Thursday, July 15, 2021

“On Friday, All the Major U.S. Market Indexes Hit All Time Highs – But They Are Going Higher!” – Joe Rollins

Every now and again I like to quote myself because it seems over the last two years, I have been more closely predicting the outcome of the markets than people that are paid many times my pay scale.  It just doesn’t seem like there is a high level of confidence in the economic recovery, which is absurd given the overwhelming evidence to the contrary.  Everywhere you look prosperity reigns, but there is an overall skepticism that the general public just cannot shake.  It is unfortunate since so many potential investors have been sitting on the sidelines waiting for a market correction for the last 18 months and all the market has done is gone higher.  Maybe all  this passive cash sitting in checking accounts will be implemented in the coming months.  For their sake, I hope so.  


I have a lot to discuss for this posting and some of it I think is very useful information for future investments.  I must discuss why the unemployment rate of 5.9% in the United States is an illusion and we will get closer to pre-COVID unemployment ratios before the end of 2021.  I also want to discuss why inflation is really not an issue at the current time but, more interestingly, why is it that the bond market is not reflecting higher interest rates with potential inflation.  I also want to discuss why the U.S. government’s attack on Big Tech is entirely misplaced.  And for the new readers of this report, I am going to actually define socialism since it is the most misused and misunderstood term in the English language.  I have so much I want to discuss and so few pages, I need to get started.  First, I need to report on the month ending June 2021.  It was an excellent month by all standards to go along with an excellent six months of the year.  

Ava horseback riding in Yellowstone

The Standard & Poor’s Index of 500 stocks was up 2.3% during the month of June and up 15.2% for the six months ended June 30, 2021.  The one-year return on that index is 40.8%.  The NASDAQ Composite was up 5.6% for the month of June and is up 12.9% for the year 2021.  The one-year return on that index is 40.2%.  The Dow-Jones Industrial Average was flat during June but is up 13.8% year-to-date in 2021 and its one-year total return is 36.3%.  The Bloomberg Barclays Aggregate Bond Index was up 0.8% in June but is down 1.7% for the year 2021 and for the one-year return this index is down 0.5%.  As you can see, all the market indexes had a minimum of 36% returns and the bond index over the same time frame had a negative return.  I fully expect that bonds will underperform cash for the rest of the year, even though cash is earning virtually zero.  

This last month I was out in Montana at Yellowstone and the surrounding areas.  Everywhere we went there were signs begging for new employees.  It is amazing that the unemployment in the United States is 5.9% when there are so many employers begging for workers.  As of May 2021, it is reported that there are 9.3 million unemployed in the United States.  Recognizing that this is a huge decrease from the 23 million that were unemployed in April of 2020, the question everyone is asking is why are there still so many people unemployed?  

Dakota and Ava at the entrance to Yellowstone

As of May 2021, there were 9.2 million job openings in the United States.  As you can see the number of unemployed and the number of job openings are almost equal.  I forecast that there will be a major employment rush between now and the end of the year for reasons that should be self-evident.  

The basic reason why employees are not taking jobs and staying on unemployment is because it is in their best interest.  If you are a server or in the hospitality industry and you can make as much sitting at home, tax-free, as you make working 12-14 hours a day, it would be illogical to assume that people would take those work hours in lieu of the free money.  However, all of that is getting ready to end.  The major reason why the government is responsible for the unemployment rate is that it has made it too easy to draw unemployment for the average American.  During 2020, the Federal government supplemented state unemployment with a $600/week bonus.  During 2020, that amount was clearly needed to give people a bridge from unemployment to future employment.  However, that is tainted by the fraud that occurred in the unemployment system, which I will discuss later.  After the $600/week program terminated, Congress and its infinite wisdom added $300/week to continue through September 6, 2021.  Already, 24 states have eliminated that benefit and lo and behold, the unemployment in those 24 states is a very respectable 4.4%.  The rest of the states and the District of Columbia, set a later date to end the program in September and their unemployment rate is 6%.  I am not exactly sure what Congress misunderstands regarding these percentages, but it is fairly clear that ending these benefits led to higher employment and lower unemployment.  The President recently said that in his opinion these benefits were not leading to higher unemployment, but clearly the numbers do not support his conclusions.  

Buffalo everywhere you look!
Aren’t they beautiful?

There are two major events that are getting ready to happen that will drastically change the unemployment in America.  First, as mentioned, the $300/week supplement of unemployment by the Federal government will end on September 6, 2021, thankfully.  Many calls to extend this unemployment benefit have been proposed by Congress, but recently the Administration announced that there would be no extension granted.

But more importantly, the CDC has announced that all schools should be in-person and open for this term in 2021.  So, the combination of the availability of childcare and the elimination of the extra benefit will force many Americans, currently unemployed, to go back to work.  As I have mentioned often in these writings, when you employ people, you do a great deal to help the economy.  Suddenly you have a wage earner that is supporting other people and consuming goods which increases the economy.  It is now anticipated that the U.S. economy would grow at an astounding 9.6% for the year 2021, which would be the best GDP in over 40 years.  But also, it is very possible that this continued growth will carry over into 2022, which will accelerate corporate profits as the economy continues to grow.   

A gorgeous rainbow over the 
Grand Canyon of Yellowstone

We were all saddened to learn that recently it was announced that nearly 40% of all the unemployment benefits paid in 2020 were due to fraud.  The numbers are basically staggering.  It is estimated now that around $400 billion in unemployment benefits were paid to fraudulent recipients and the vast majority of this money ended up overseas in the criminal element.  I have often commented on these pages that the U.S. government does just about everything worse than anyone else.  I have commented often that the only good thing the U.S. government does is run the military.  I am not sure this is such high praise given that there is no competition for running the military and they are literally the only game in town.  Virtually everything the government does, it does worse than the private sector except one.  

I have the ultimate high praise for the government in the handling of this vaccine.  Back in early 2020 when the Administration opened their pocketbooks and funded research on the vaccines, who would have thought vaccines could be developed and distributed within an eight-month period?  This would not have happened without the U.S. intervention into the developing process, which has led to a complete turn around in the so-called COVID financial disaster.  We certainly could agree to disagree on how it was handled, but all of us praise the fact that it is nearly finished.  As of this morning, 333 million vaccines have been administered in the United States.  There are 151 million Americans that are fully vaccinated, which represents 56% of the total population.  While cases are not eliminated, they are dramatically reduced.  It was recently reported that 90% of the current deaths from COVID are solely from unvaccinated people.  It is hard to believe people will not get vaccinated.  I assume they just like playing “Russian Roulette” with their lives.  I often wonder if these are the same people that don’t get other vaccines, such as polio, etc.  While the business world is coming back to pre-COVID levels, this could only have been accomplished with the Federal government’s funding and handling of the vaccine rollout. 

One of the many stunning falls at Yellowstone

The important event of school opening in the fall will be a huge employment gain for Americans.  So many cases were quoted as employees could not go to work due to childcare needs.  This will be alleviated in the fall and with the elimination of the $300/week Federal unemployment benefit, those unemployed will have no choice but to seek employment.  At the current time, it pays to wait.  Each of the unemployed are looking for better jobs and the Federal subsidy gives them time.  Time is running out and now they will need to be employed.  

Last month I discussed why inflation was probably not a problem in the current stock market.  This month we are starting to see the effects of the high inflation slow down.  A lot of people misunderstood the shortage of goods we had in America once the economy began again.  It wasn’t really a shortage of goods, but a shortage in the supply chain.  Ever since America started keeping their inventory on an as-needed basis, they only maintained enough inventory to get by from day to day.  When the influx of business occurred, all of a sudden inventories were inadequate and had to be built up again.  Last month I reported that the price of lumber had jumped almost 100% and shortages were throughout the building industry.  You will be happy to know that the price of lumber fell 40% during the month of June, but it is still elevated from the pre-COVID levels.  Evidence is everywhere that the demand pressure on inflation is falling.  Retails sales are estimated to have fallen 0.6% in June after falling 1.3% during the month of May.  Almost this entire reduction of retail sales is based upon lower car sales.  There have been so many cars purchased in America over the last year at some point it was almost assured to have to fall.  Now we are seeing that happen.  

Mia’s parents – Muzzy (93) and Jennie (88)
celebrating their 68th wedding anniversary

The financial world was shocked this month when the 10-year Treasury fell to 1.25%, rather than rising due to the fear of inflation.  Many on the financial shows on T.V. are scratching their heads as to this conundrum of bond yields falling when clearly they should be rising.  Most people are projecting by the end of 2021, a 2% 10-Year Treasury, but in the short-term rates are actually falling rather than going up.  However, I predict this too will be short lived.  

The Federal Reserve in their monthly meeting notes indicated that it would continue to buy $80 billion in treasury bonds and $40 billion in mortgage bonds each month.  As you can see, the Federal Reserve is almost the sole buyer of these new bonds being issued.  This has the incredible effect of keeping interest rates down both in the treasury rates and also in the mortgage rates which benefits real estate.  The Federal Reserve has a dual mandate to maintain full employment and to control inflation.  With unemployment at 5.9%, the unemployment rate is unsatisfactorily high.  

At the current time, inflation, measured at 3.4%, has the potential to be high but has not been realized by the economy yet.  It should be clear to all that with the Federal Reserve continuing to buy up virtually the entire issues of treasury and mortgage-backed securities on a monthly basis, that the minute they stop, interest rates will reverse and go higher.  The Chairman of the Federal Reserve, Jerome Powell, has indicated he will support the economy over the foreseeable future.  He has done a spectacular job in bringing the country back from recession due to COVID, to levels that may, by the end of the year, exceed the pre-COVID economy.  However, we all should be warned that the minute he withdraws support, likely in late 2021, we will be dealing with higher inflation and higher mortgage rates, but with an economy that is more-likely-than-not to be fully employed.  

Oh, give me a home….

One of Warren Buffett’s most famous sayings is “Never bet against America”.  I got to thinking about it this month with all the Federal Government’s actions to limit big businesses.  I go back to 1971 when there was a huge oil shortage in the United States and the price of oil quadrupled in over a matter of couple months.  I also remember that Congress was pounding their fists over and over again for two decades trying to develop an energy policy in the United Sates that would encourage more oil production.  I vividly remember when George Bush (Part Two) went to Saudi Arabia and literally begged the Saudi government to sell us more oil to keep the price down.  I remember during the Jimmy Carter years when the price of oil led to inflation that was close to 12% annualized.  All this chaos in the supply of oil was solved by the private sector without the government’s intervention.

With the innovation of fracked oil in the Dakota’s and the implementation of better technology for finding oil, the United States completely reversed its position and is now the largest producer of oil in the world.  In fact, the United States produces enough oil to be self-sufficient and to even export oil.  Even though the current Administration is doing everything within their power to limit oil production, there is no question that the rest of our lifetimes for the readers of this newsletter, oil will be a majority contributor to energy.  Again, it was the private sector that solved this issue.  Better technology led to higher recovery of oil and a problem that the government could not solve was solved by the private sector.  

A quiz for the readers of this newsletter: What five companies recently had a market capitalization in excess of $1 trillion?  For those that do not know the answer, it is Apple, Amazon, Microsoft, Google, and Facebook.  Just in their short lifetime, these companies went from nothing to a $1 trillion valuation due to extraordinary technology and entrepreneurs that were willing to challenge the existing technology.  If there is one classification that the Unites States is “leaps and bounds” ahead of the rest of the world it is technology.  The software created in the United States is currently used around the world in all countries.  

Ava at “Old Faithful”

While China has proven to be an extraordinary copier of technology and software, they have yet to even scratch the surface on creating this technology juggernaut.  You will notice that wherever you see technology running, Microsoft Windows is generally behind it.  With Facebook’s 2.6 billion active users, they reach around the world, yet they sell no products.  These five companies are prime examples of entrepreneurs in the United States creating vast wealth for them and their shareholders due to a better idea.  And now our government wants to punish them.  

Rather than punishing the successful we should be praising them.  By virtue of their accelerated growth, they have made many Americans massive amounts of wealth to solve the retirement issue.  It is rather sad to see the government line up to oppose these companies and to treat them as the bad guys when in fact they should be praised by the government itself.  The beauty of these companies is that they are forever changing.  I do not even think for a second that any governmental actions could do much to harm these companies since they will just migrate around the problems for years to come.  Recently the FTC challenged Facebook to complain that they had a monopoly in the field.  The courts quickly threw out that case since it was clearly a desire of states and the FTC just to blackmail money from Facebook.  I am positive there will be thousands more lawsuits coming in recent years, but I am convinced that these dominant companies will only grow and prosper in the future.

Ava and Dakota at Steamboat Geyser

We all must give a vote of gratitude to this evolution of technology by the American companies.  It makes Americans stronger by improving their financial wealth and it continues to make America the leader by far in technology.  The one thing that we can never do as a country is to take away our desire to innovate and implement new process.  Who would have ever believed that 10 years ago electric cars were even possible? Now every major car manufacturer has vowed to only produce electric cars by 2030.  

There is a simple reason for them converting.  Electric cars are cheaper to build and cheaper to drive.  This entire concept was thought up and implemented by Tesla.  Who would have thought that one small company with one kind of weird CEO could influence the rest of the world in transportation?  Yet, it has happened, and it has happened over the last decade.  Hopefully, future government administrations will understand that you should not punish success, but you should reward it for the benefits it has provided to all Americans.  

Ava, Joe and Dakota enjoying 
the waterfall views 

All the above paragraphs have led me to give you an explanation of socialism, so you can better understand.  It has always been perplexing to me why American students come out of school so completely sold on the concept of socialism as the future.  As they teach socialism in grade school and college, I would think that anyone with any intellect would definitely want to embrace socialism.  Who in their right mind would not want an economy with no poverty?  Who in their right mind would not want an economy where everyone was treated the same?  And there would be no rich people nor poor people, but everything in between.  Who would not want an economy where the government provided for all your natural needs such as medical, food, and other benefits?  It just sounds so perfect, who possibly could object to a socialistic economy?

I am often confronted by those that believe that socialism is the answer to all the United States’ problems, so I ask them a very basic economic question.  Name a country anywhere in the world where socialism has succeeded.  Would you name Russia, Cuba, Venezuela, Argentina, or any other third world country that operates under a socialistic scheme?  The one component that the textbooks have never been able to define is how do you build into an economy the desire to get ahead under socialism?  Under socialism, the really good worker and the really bad worker earn the same amount of money.  In Cuba, everyone is paid the same rate.  You can sweep the streets for $70 a month or you can work in the tobacco fields for $70 a month.  It is very hot in Cuba, and it is very hard work.  Why would anyone pick working in the field as compared to sweeping the streets if you will be getting paid the same amount of money?  

Joe and Ava at Teton Mountains

That is where socialism fails.  Once the average worker comes to the understanding that there is no way to get ahead since everyone is treated equally, they have no incentive to improve their lifestyle.  So, what happens is workers tend to be underproductive and eventually become a drain on the economy rather than a plus.  

There are many that point to China and say there is a classic case of where socialism has succeeded.  They could not be further from the truth.  China is very much a capitalistic economy.  There are extraordinarily wealthy people in China and a huge difference between the wealthy and the poor.  While the economy has socialistic aspects such as free medical, it has a limited retirement plan and for the most part has the older people depend on the younger people to take care of them.  It is absolutely true that the government in Russia has characterized themselves as socialist, but they also have one of the greatest capitalistic economies in the world.  

The one item that the communist government has realized is that to keep political unrest from the public, they must provide jobs.  It has been reported that China has built entire cities with no occupants because they want to keep workers working.  Currently China is one of the most indebted countries in the world and every time you read that China is a risk to take over the U.S. economy, you have to question how they can ever overcome their debt issue with their current growth in economy.  Yes, China maintains a communist government, but very much a capitalist economy.  As long as China can keep workers working and wages rising, there will be no incentive to overthrow the government to a republic government such as the United States.  

So, when you explain to the average person the difference between capitalism and socialism, you have to point out the United States.  Yes, it is terrible in the United States that there has been a large gap of wealth from the rich and the poor.  But the percentage of Americans that are classified as “super rich” is a very small percentage of the total population.  What is important is that the middle-class income is rising at an extraordinary high rate at the current time.   It is estimated that the average worker is increasing their wages at 5.6% annually.  This is going to accelerate as it becomes bidding process for new employees throughout America. 

Joe and Dakota overlooking
 the Grand Canyon in Yellowstone

The one thing that America has going for it is an economy that is growing and forever changing.  If the economy hits one roadblock, the economy bounces back and does an about turn into something else as it did with oil.  We went from telephones that did not work well to very sophisticated smart phones created by a small company in California.  If ever the Federal Government attempts to prevent entrepreneurs from creating new technology, then the standard of living in America will clearly fall.  

So, as we finish the first six months of 2021, it has been very profitable and eventful.  At the beginning of the year there was a huge switch from growth stocks to value stocks.  Recently growth stocks have come crawling back and now the market is higher, as represented by the five trillion-dollar companies above.   By earning 15% in the first half, it is highly unlikely that the second half is going to generate like returns.  However, you just never know with earnings as strong as they will be going forward.  As we start to roll out earrings in the major American companies beginning next week, I forecast that you will see earnings that will blow you away.  The reason technology and growth stocks have been accelerating recently is because their earnings will be nothing short of spectacular.  I anticipate a higher level of earning for all except those industries that specialize in hospitality or travel.  

Joe and Ava having a blast 
at West Yellowstone in Montana

As I have pointed out on numerous occasions in these postings, earnings are by far the most important component of future stock prices.  If earnings continue to accelerate as I anticipate, and the economy continues to tick on a 9.6% GDP growth, earnings will be spectacular for the rest of 2021 and most assuredly will lead the indexes higher from current levels.  While it will not be a straight line higher and there will be many days that will challenge your commitment to the market, I can only encourage you to stay invested at all times and enjoy the ride.  But by all means, call us if you are having doubts.  

People have asked me my reflections after our trip to Yellowstone.  There is no question, it is a truly beautiful place, but it is a strange combination of places around Yellowstone that I truly do not understand.  I was lucky enough to visit Yellowstone when I was 12 years old and once again visited when I was 71.  I think every 59 years is often enough to get the full feeling of the place.  Not being hypocritical, but realistically how long can you actually look at a hole in the ground.  

What is amazing about Yellowstone is the number of animals that you encounter on any given day.  Buffalo are walking in the streets and around every corner there are new wild animals to watch.  It is quite an incredible experience.  But if you want to know about the prosperity in America today, it was in full bloom at Yellowstone.  

It was reported that some days there were two hour waits just to get in the gates at Yellowstone.  Fortunately, we had a pass and did not have to make that wait.  We started out staying in Jackson Hole in Wyoming and it is truly a contradiction of any type of reality.  Even though there are only 10,000 people in the town, tourists are everywhere and it is impossible to move inside the city.  You cannot get reservations at any restaurants since they are overrun with tourists.  Frankly, it reminds me of Gatlinburg with all of the gift stores and items that just sell nothing but junk.  It must be the playground for rich people since homes are so unbelievably expensive at Jackson Hole.  

Morgan, Kari and Mia celebrating
 on  Kari’s wedding day

We moved on to a little town named West Yellowstone, just outside of the west gate of Yellowstone for the rest of our trip.  This town was the exact opposite of Jackson Hole.  The best restaurant in town was a barbeque place that had picnic benches set up outdoors, nothing fancy about this town only a few hours away from Jackson Hole.  

Every interesting place in Yellowstone was covered with tourists and parking was almost nonexistent.  In many cases cars were lined up far down the road to get into the few parking places that were available.  While truly a spectacular place in every regard, if you are going there for a short, leisurely visit, I highly recommend you go in the fall and not the summer.  

One event that clearly stands out in my mind from our trip is that when I was 12 my father made it an absolute requirement that we be there one night when “Old Faithful” goes off.  All of the publicity indicated that it was an illuminated “Old Faithful” geyser.  I vividly remember all of us getting in the ’59 Chevrolet to get to that part of the park where “Old Faithful” sits even though we were almost asleep as it finally became dark around 9:30 at night.  

We could not control our excitement of the upcoming event; actually seeing “Old Faithful” illuminated.  You could guess our disappointment when finally, after dark, “Old Faithful” did its thing and shot hot water 100 feet in the sky, but only one small light illuminated it.  For reasons that I never quite understood, this seemed to satisfy my father and that was enough for all of us since we could now go to bed.  

As always, the above comments are based on my personal research and my personal opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins 

Wednesday, June 9, 2021

“Far More Money Has Been Lost By Investors Preparing For Corrections, Or Trying To Anticipate Corrections, Than Has Been Lost In Corrections Themselves.” – Peter Lynch

Probably a great deal of the investing public has never heard of Peter Lynch.  During my formative years of investing, he was the most famous investor of all time.  Peter Lynch ran the Fidelity Magellan Fund for 13 years with an average gain of 29.2% and had unparalleled success.  Even in the stock market crash of 1987, Fidelity Magellan Fund had a positive return.  I think his advice above is very important today as we face a recovering economy and an earning explosion.  

I became curious as to why so many investors are unwilling to invest more money during this time, so I did an informal survey to find out exactly what is bothering people and preventing them from investing.  I got many responses, but most of them centered around the potential increase of inflation, the wild and crazy spending in Washington whether the economy is actually recovering, a potential increase in interest rates by the Federal Reserve, and a basic misunderstanding of corporate earnings.  

Ava posing with her 10th birthday 
celebration signs

I have decided to address these issues, so my readers understand exactly where I stand.  I also want to give you information regarding the recovery of the economy that is in controversy.  It is so absolutely crystal clear to me that the economy is exploding on the upside, that it is fascinating to me that so many people continue to question it.  Also, I want to discuss general investing policy and how that affects your potential retirement.  I always like to quote the famous investor Warren Buffett, when he said “Do not save what is left after spending, spend what is left after saving.”  I intend to cover all those subjects and hopefully convince investors that many of the fears expressed above are either temporary or completely misplaced.  

Before I do so, I need to reflect on the performance of the financial markets for the month of May.  As you know the year 2020 was an extraordinary year on the upside for the markets.  It has also continued into 2021 with the markets continuing to rise.  One of the oldest sayings on Wall Street is, “Sell in May and go away.”  I think if you follow that advice over the summer months, you may miss a good opportunity.  

The Standard & Poor’s Index of 500 stocks was up 0.7% in the month of May and is up 12.6% for the year 2021.  The one-year performance on this index is an extraordinarily high 40.3%.  The NASDAQ Composite was down for the month of May 1.5% and is up 7% for the year 2021.  The one-year performance on this index is a 45.9% increase.  The Dow Jones Industrial average was up 2.2% during the month of May and is up 13.8% for the year 2021.  The one-year performance for the Dow Industrial is also an outstanding 38.6%.  Just for the sake of comparison, the Bloomberg Barclays Aggregate Bond index was up 0.2% in May, but is down 2.5% in the year 2021 and is also down for the one-year performance at negative 0.7%.  

Kari and Adam’s engagement 
photoshoot before their June wedding

If you compare the three major market indexes, which were up 38% or higher over the last year, you can see that the bond index was a major disappointment, reflecting a negative return for the one-year period ended May 31, 2021.  One of the major reasons for concern for investors is that they believe that inflation will soon impact virtually every item we purchase and every commodity that is essential for the everyday budget.  There is no substantial evidence that inflation will impact the economy this quickly.  In fact, if you go back and review the history of inflation, you will realize that it takes many years to actually affect the economy in general.  

I was here in Atlanta during the 1973 oil crisis.  Most people do not even remember that the reason that crisis occurred was because OPEC, “Organization of the Petroleum Exporting Companies,” decided to withhold oil from all the countries that supported Israel during the Yom Kippur War.  Basically, the OPEC countries decided that they would not sell oil to the United States during this time period and correspondently, the U.S. suffered through a substantial decline in its oil imports and a substantial increase in price.  During that time, the use of oil affected so many different aspects of the American way of life it forced prices up almost immediately.  The price of oil went up almost 300% from $3/barrel in the U.S. to nearly $12/barrel.
  
I can vividly remember standing in line to purchase gasoline during that very difficult time.  I also recall the dramatic increase in the price of a gallon of regular gasoline which rose 43% from 28.5 cents a gallon in May 1973 to 55.1 cents in June 1974.  Just looking at the above numbers you would think that inflation would impact the United States almost overnight.  But history reflects something else.  

It wasn’t until the late 1970’s (6 years later) that inflation really became a serious financial issue for the American economy.  Yes, we had inflation prior to that time and went through ill-placed actions by the government to hold down prices, which was unsuccessful.  However, it really got out of control during President Jimmy Carter’s years, when double digit inflation was commonplace.  The point of this scenario is that it takes years to impact the economy with significant inflation.  I think we are seeing that reflected today.  Even though prices are moving up, inflation in the economy is almost assuredly an event that will be years from now before it will affect and hurt the U.S. economy.  It even looks like some of the prices have already started to moderate.  

You also see it in the words of the Federal Reserve members that are most influential in controlling interest rates.  The most important regional bank in the Federal Reserve is the New York Federal Reserve.  Its President, John Williams, recently said we are “Still quite a ways off from maintaining substantial further progress.”  Basically, what he quoted was a reflection of Federal Reserve’s Jerome Powell’s many statements saying that the economy has yet to overheat and, therefore, any changes by the Federal Reserve at the current time would be unwarranted.  

There is also a clear misunderstanding of how inflation impacts financial markets.  There is no question that if the Federal Reserve started to increase interest rates dramatically, it would start to hurt stocks.  But using the Federal Reserve’s own words, that may be years away.  It is, however, already dramatically hurting the performance of bonds.  As noted above, bonds for the one-year period had a negative rate of return.  Bonds are not a good investment right now.  However, the effect on stocks is much more positive.  

Morgan seeing the waterfall while 
hiking at Roswell Mill

If you envision a company that has inventory and inflation had increased the prices of that inventory, they have instant gain with an increase in the underlying products that they sell to the public.  This instant increase in prices generates future higher profits for the company.  In addition, the assets owned by the company are likewise increased in value due to inflation.  Therefore, the machinery, equipment and real estate also have a higher valuation prior to the increase in inflation.  While these increases in valuation do not necessarily increase the value of the stocks, they dramatically increase the cost for a competitor to come in and compete with the company itself.  This increase in fair market value of the underlying assets is very much a positive for corporate earnings.  Why some question that runaway inflation would have a dramatic negative effect on the economy, it appears at the current time that this economy is literally “on fire” with the Federal Reserve waiting for future increases for future information to make any change in interest rates.  

There was a short-term sell off of the stock market last week when the Federal Reserve announced that they would be selling some of their corporate bonds that they have accumulated during the crisis.  However, what they did not specifically mention was that they would not be selling any of their Treasury bonds.  In fact, the Federal Reserve currently continues to buy Treasury bonds on a regular and continuous basis.  Most people are confused why the 10-year treasury has not moved significantly above the 1.6% rate when reported inflation is well above 2%.  There is a specific reason why that rate is continuing to be steady.  With the Federal Reserve basically buying up all the excess Treasury bond issued it is unlikely that rate will move dramatically without the Federal Reserve backing off.  At the current time, the Federal Reserve announced that it is not their intention to back off on these purchases prior to 2023.  Therefore, if your major concern is that inflation would impact the value of your stocks on a current basis, that is misplaced.  

Danielle, Reid and Caroline smiling for this 
sweet shot

One of the items that always perplexed me was why people do not save more.  I get the answer as quoted above by Warren Buffett that they just don’t have any money left over after their monthly expenditures to save.  What I have seen over my 50 years in the business, young couples come out of college and both begin working simultaneously and make a good income.  Over time they just increase their expenses so that their monthly budgeting equals basically their income.  When asked why they do not save more they reflect upon all the expenses and indicate there is nothing left to save.  

I often question why people tell me they only put in their 401(k) plan exactly what the company matches.  Since a 401(k) is, under current tax law, the absolute largest tax deduction a young professional could get, you wonder why they do not participate more.  In fact, in most cases, virtually all workers should attempt to maximize their 401(k)’s on a regular basis.  If you look at a chart where you start to save early in life and continue to save over time, a financially secure retirement is almost guaranteed.  However, if you wait until later in life the difficulty to accumulate these amounts are enormous.  

As we all know the stock market on average goes up 9% a year,  yet too many people are trying to time the market and ignore that proven fact.  If you look back to March 2020 all the people that sold out of the market during that time period were the losers in a financial market that was legendarily high.  Take a look today at all of the cash sitting in checking accounts.  It is now estimated that over $3 trillion is sitting uninvested in money market accounts today.  We all know that money markets are paying virtually zero interest and CD’s are paying almost zero.  As noted above, over the last one-year period, the S&P 500 is up 40% and money market accounts are up 0.1 of 1%.  You do not have to be a Philadelphia lawyer to understand the value of being invested as compared to being in cash.  

The Schultz family in their
Sunday Best

Last week the Commerce Department reported that May hiring increased by 559,000 employees.  It also announced that the unemployment report dropped from 6.1% to 5.8%.  However, with those numbers came out the stark reality that there are still 9.3 million people in the United States that are unemployed and potentially available to work during the month of May.  One of the major components of inflation is job-related wage increase.  It should be evident to everyone that hiring is almost at a standstill in America because so many workers refuse to go back to work.  There is no shortage in employees, there is just a shortage of people wanting to work.  Virtually all industries that pay minimum salaries are searching for employees to fill those positions.  One of the major reasons quoted is that the extra $300 a week in Federal unemployment insurance is causing employees not to want to work, and to stay home and collect benefits.  It has already been announced that 25 states will eliminate this $300 increase, effective immediately.  The President also announced that these increases will stop immediately in September of 2021.  The economic effect of stopping these increases in Federal unemployment should be obvious.  If only half of the people currently unemployed now take jobs, since unemployment is unprofitable, the economy should pick up even further.  These are people paying taxes and consuming once again to help the economy grow.  

People ask me all the time how I knew and how I was correct regarding the absolute turn around in the economy during the early parts of 2021.  Basically, I look at the numbers every day to determine whether the economy is moving ahead or sideways.  But if you want to hear information that is more down to earth and easily understood, look at the case of Las Vegas, Nevada.  For the month of April their weekend occupancy in their hotels was 83.5%.  In January, that weekend occupancy was 48%.  During the month of April there were 2.9 million air passengers coming into Las Vegas.  In the month of January there was 1.5 million.  Most importantly, during the month of April the unemployment in Nevada was 8%.  During April of 2020, the unemployment in Nevada was 29.5%.  As you can see there is a real-world increase in the economy happening overnight.  

I happened to fly to Florida over the Memorial Day weekend and can report that the airports were completely crazy on Memorial Day.  There were lines to get into restaurants lined up down half the corridors with passengers.  There was a shortage of rental cars in both markets and the airport appeared to be exactly at the same level of capacity that it was prior to the pandemic.  I flew quite a bit during the pandemic and can report walking into Tampa International Airport at seven o’clock at night and there not being one single passenger other than me.  This most recent trip, the airport was virtually at capacity of people trying to catch flights out of Tampa.  

DeNay visiting the incredible
 Van Gogh exhibit

Another common reason I hear people will not invest in the market is that the market is too expensive.  One of the things I that I try to do with potential investors is ask them how they have determined that the market is too expensive.  Well basically they read what is quoted in major publications and believe those facts and figures to be accurate.  But one of the things misunderstood by the investing public is that if the price of stocks are at a certain level today, but earnings continue to go up, doesn’t that mean that prices will be cheaper in the future?  As I have often said in these postings, the most important component in pricing stocks is the level of earnings of these stocks.  At the current time, earnings are exploding to the upside and the public does not seem to get the point.  It is now being forecast that earnings from the period from May through December of 2021 will increase a dramatic 23% higher from where they were in May.  If earnings continue to increase, as I suspect they will, stocks will continue to get cheaper.  Why would you not participate in this increase when we absolutely know it is occurring all around us?  

One of the major concerns of the investing public has been the pandemic and the spread of COVID.  Maybe you haven’t noticed that COVID infections are down close to 90% of what they were six months ago.  In the entire Unites States yesterday there were only 11,000 new cases.  Deaths from COVID are falling dramatically and now average around 400 a day as compared to several thousand six months ago.  If we could encourage the rest of Americans to get vaccinations, heard immunity could be reached this summer.  Already 63% of Americans over the age of 16 have now been vaccinated at least one time and the number of vaccinations is going up roughly at one to two million a day.  It is very clear that the vaccinations are stymieing the spread of this terrible virus.  Correspondingly, as cases go down the public is out again spending all their accumulated resources.  Given the fact that they have not been able to spend over the last 14 months, you are seeing an explosion in hotels, rental cars and virtually any type of lodging on the beach.  

This upward explosion of the economy has occurred without the new Federal money that is being discussed to spend in Washington.  At the current time, Congress is considering an additional $4 trillion of Federal stimulus in the way of infrastructure type changes.  This would provide funds for additional roads, highways, bridges, dams, etc.  While all those things are clearly needed, dumping all that money into an already overheated economy will only make the shortage of commodities worse over the short term.  It is my opinion that Congress will go slow with these increases, and we will not see them implemented until much later in the year 2021.  

Jodi Dufresne, 36-year client, enjoying
 her horse on a spring day

So where do we really stand on the economy and exactly what does the future hold? While no one can truly predict the future, we do have some evidence of exactly where we stand.  The Federal Reserve of Atlanta makes a projection of future GDP growth based on their internal models.  Currently they are forecasting an increase of GDP for the second quarter at 10.3%.  The entire Federal Reserve is forecasting the economy in the U.S. for the entire year of 2021 to increase above 7%.  If we were to end the year with a 7% increase in the economy that would be the best yearly increase since the Ronald Reagan years.  There is no question that the economy is coming back in a big way.  We all see it every day around us and just like I predicted, the increase will be substantial and long-term.  

In circling back to the original reason for writing this blog, I am questioning why people will not invest all the cash they are sitting on.  After a dramatically higher year in 2020 and a great start to 2021, everyone should consider investing their cash that is earning nothing for long-term results.  We now know that the three components of higher stock prices are firmly in place.  The three components of higher stock prices are interest rates, the economy and corporate earnings.  The chairman of the Federal Reserve, Jerome Powell, has confirmed that he has no intention of restricting the economy or increasing interest rates prior to 2023, which is a cool 18 months from today.  We know based upon the information presented above that the economy is totally on fire.  Businesses today are dealing with the exact opposite that they dealt with over a year ago.  Corporate America is trying to hire employees, but they cannot do so.  Everywhere you look, employers are seeking employees but cannot fill those positions.  

Josef Martinez, Morgan and Kari 
catching a Braves game

These trends are a clear indication of the strength of American corporations since they are now hiring rather than laying off employees.  Also, we know that corporate earnings are dramatically increasing and even the pros are forecasting an increase in earnings in 2021 of greater than 20%.  There are many forecasters that think in the last half of 2021, corporate earnings will be even higher.  It is a fairly conservative forecast that the earnings will be higher given all of the new employees that have gone on the payroll in the early 2021.  In addition to the prior Federal stimulus, if the government continues to give out free money to Americans and businesses, we expect the economy to grow even faster and bigger.

So, my forecast for the future looks like an economy that will continue to grow, earnings that will continue to increase and interest rates that will be stable.  That is the trifecta of positive economic data that will lead to higher stock prices.  There is absolutely no question that the concern of the Federal deficits will increase inflation.  However, my assumption is based on history that the increase in inflation is years away rather than months away.  We also know that eventually the Federal Reserve will have to increase interest rates to slow down an overstimulated economy.  Once again maybe years from now, but not months from now.  As we go forward to the summer and more and more Americans become vaccinated and corporate travel and recreational travel doubles, you will see corporate profits unprecedented in modern times.  All these positive economic effects will have a negative effect on bonds, but a positive effect on stocks.  

There has been a dramatic change in the investing of growth stocks in the last part of 2020 and the first five months of 2021 as there has been a transfer to value stocks due to the turnaround in the economy from recession to expansion.  However, do not give up on the growth segments of investing.  The growth companies such as the large tech companies are recording profits unprecedented in American commerce.  All of the positive economic events represented above will only increase those profits, not decrease them.  While values stocks are certainly rallying in the first part of 2021, I see a shift back to growth this summer and an expansion of growth for the rest of the year.

As always, the above comments are based on my personal research and my personal opinion and certainly no one can forecast the future accurately.  However, the realization that the economy has already turned should be self-evident and those who are sitting on cash should be moved to make appropriate investments. 

On that note, come visit with us and discuss your goals and financial plans. If you are interested in discussing your specific financial situation, please feel free to call or email.

As always, the foregoing includes my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.

Best Regards,
Joe Rollins