From the Desk of Joe Rollins
I know it is very frustrating for you as an investor to sit back and watch the market trend down week after week and get nothing but more bad news from the financial press. This is not my first “rodeo” as I have been through many of these downturns in the past. You really have to separate an investing period created by a bad economy from one created by overzealous traders and hedge funds. Today we have that exact situation where investors are losing money and oftentimes making bad investment decisions just because the market is acting in a manner that does not reflect its economic underpinnings. I will try to explain all of this throughout the post.
I also want to look into what is happening in the international markets with China taking a hard line on Covid-19 and the serious problems affecting Europe and their energy crisis. Finally, I want to express my opinion on the phrase you read everywhere in the financial press nowadays, which is “demand for goods and services is slowing throughout the economy.” Hopefully, I can explain that phrase better.
After a very excellent month of July which was up 9.2%, once again all the indexes were down during the month of August. It has been a whiplash one-up, one-down month for almost a year. However, we must accept the volatility in order to be positioned in a way to benefit when the upturn occurs.
For the month of August, the Standard and Poor’s 500 Index was down 4.1%. For the year, it is down 16.1%, but on a brighter note, over the ten years, this index has averaged a gain of 13.1% per year. During the month of August, the NASDAQ Composite Index was down 4.5% and continues to be down 24.1% for the year 2022. The 10-year average on this index is positive 15.7% per year. The Dow Jones Industrial Average was down 3.7% during the month of August and is down 12% for the year 2022. The 10-year average on this index is positive 11.8% annually.
If you thought you would be more conservative and invest in bonds, you certainly got hurt during August. For the month of August, the Bloomberg Aggregate Bond Index was down 2.8% and is now down 10.7% for the 2022 year. As a comparison to all the indexes above, which have had double-digit gains over the years, the bond index only has a positive return of 1.3% for the 10-year average.
I often get calls or emails from clients after a huge drop in the market. I thought I would give you an illustration of why this occurs and why you should ignore it for most investing purposes. On August 26, 2022, the Chairman of the Federal Reserve, Jerome Powell, was to give a speech at the Economic Conference in Montana. The market had just reported excellent labor news and there was a certain amount of euphoria when trading started. However, after Chairman Powell gave his 10-minute speech, where he reemphasized again that the Federal Reserve would have to work hard to keep inflation down, the market immediately turned negative and finished the day with the Dow down over 1,000 points.
Clients really do not seem to understand why these types of trading events occur since they are not in tune with the day-to-day volatility that comes with trading. I wonder how many investors were actually sitting in front of their computers at 10:00 a.m. on Friday, August 26th, to punch the sell button on their securities. As this clearly demonstrates, this selloff occurred because the traders took a negative position due to Chairman Powell’s comments about more interest rate increases.
Another way you can always spot this type of irrelevant trading is to look at the percentage downturn on each of the indexes. You will note that on a day like this, all the major market indexes were down almost the same percentage. What could have possibly been so wrong that major stocks such as Apple, Microsoft, Amazon, and Google were all down multiple percentages for the day? When you short the market indexes, you must short the good stocks along with the bad stocks. You are not picking a specific stock to short, but you are shorting the entire index in one trade. When you short an index that means you are placing a sell position on the index, whether you own the index or not, the brokerage house will allow you to bet that the index will go down rather than up.
Even though those stocks mentioned above have excellent records and continue to report record profits, they are trending down because they are also the largest component of each of the indexes. So, when you see an index selloff with such a sharp inter-day reversal, you can rest assured that it is not investors who are taking those losses, but traders and hedge funds.
The same thing happened on September 2, 2022. The unemployment report came out, which was excellent and strong for the economy, and the market, as it should, rallied with the news. Around lunchtime, the Dow Jones was up close to 300 points and there seemed to be a strong buying effort on the part of investors. However, right after lunch, Russia announced that they would no longer provide natural gas to Germany, and they would shut down the pipeline until further notice. Immediately the markets turned around from up 300 points to down 300 points in a matter of minutes. Who exactly was sitting at their terminal watching the markets that day that could move the market more than 600 points in a relatively short amount of time? The traders of course.
Another reality that must be remembered during this time of year is that there are very few traders actually working during this vacation time of year. The volume on the markets have been low recently and it is much easier for a trader to manipulate the market when there is such low volume. Once again, the average investors look down at their portfolio that is losing percentages, meanwhile, this is all artificial trading to benefit traders and hedge funds to the detriment of the average investor.
All these swings in the market should not be construed to believe that the market is bad. The underlying strength of the market continues to be high employment and high corporate earnings. Neither of those appear to me to be winning over the hedge funds and traders. On Friday, September 2nd the Labor Department reported that 315,000 new employees were hired for the month of August. While certainly, this was an excellent number and a great many employees went back to work, it was less than the 526,000 jobs that were reported during the month of July. Maybe this is showing a sign of a decrease in employment, but I highly doubt it.
The evidence is everywhere that businesses are seeking employees for all positions. There have been some reported high-profile situations where employers are laying off employees for various corporate reasons, but the Labor Department is reporting that these people who are losing their jobs are quickly finding new ones. Once again, during the month of August, we had an increase in employment in the U.S. and we continue to have twice as many job openings as we have unemployed people in America. If there is an unemployed person today with over 11 million job openings in the U.S., you may rest assured that they are not employed due to their own will. It should not be long before they will run out of money and seek employment.
People are also confused as to why the jobless rate rose to 3.7% in August from the 3.5% low in the previous month. These are statistical numbers that confuse people when they do not read all the details. Even though there was an increase in employment of 315,000, there was a marked increase in the number of people that are in the job market. Market participation is extraordinarily important. Since the pandemic, many people have elected not to work, and the participation rate has only been 60% of the workforce in a given month. This month we saw a rush of new employees back into the employment market, which is an extraordinarily good thing for future employers. With this increase in the number of people willing to work, the percentage of unemployment goes up since the number of people employed divided by the available number of employees creates this average. For all practical purposes, this employment report was a “goldilocks” report. It shows that the economy continues to expand with new employees, but not so hot that it needed immediate reaction by the Federal Reserve in the way of higher rates.
Everyone seems to be unsure if inflation is continuing to go up or starting to fall off. A true indicator of the potential for rising inflation is the M2 Money Supply. The M2 Money Supply measures all of the financial assets of households such as savings accounts, time deposits, and balances in retail and money market funds. Basically, it represents the overall savings of American households. This money supply grew dramatically during the pandemic due to the excess government money given to each household. However, recently this index has stalled and has not been growing. With the money supply in excess of $21 trillion, which is still quite high but not growing, many believe this indicates that inflation is slowing. Many economists now believe that inflation has already peaked and is falling and by the first of the year, this so-called fear of inflation should be roughly in line with the Federal Reserve’s target rate of 2% in early 2023.
What is interesting to me is that all of these so-called inflation indicators have not properly forecasted inflation. At one time we were led to believe that gold was the ultimate representation and protection against inflation. However, for the year 2022, gold is down roughly 6.8% – so no help there from gold.
During the peak of the selloffs in 2022, I received many calls from clients that wanted to buy inflation-protected bonds. At that time, the bonds were paying a rate equal to the inflation rate and many thought that this rate was only going to go up. However, if you look at the inflation-protected index represented by Fidelity Investments, you will note that it is down 7.6% for the year and is actually down 6.1% for the 12 months ending August 31, 2022. These very well-known indicators of inflation have not supported the case of higher costs into the future. All of this I believe to be very encouraging information for stock investors. If in fact we have a shift in inflation over the next two or three months, maybe this long grueling selloff will finally turn around.
I rarely get into the details of economic forecasting, but sometimes it’s necessary to make sense of what is going on. One of the most quoted and most important indexes for analyzing the U.S. economy is GDP. Basically, GDP defines the gross sales in an economy. However, there is another important aspect to be considered. For every dollar an individual spends to buy some goods or service (a restaurant meal, a car, a doctor’s visit, or another individual dollar of income for someone to deliver the goods and services), GDP captures the spending size of these transactions. Gross Domestic Income is the other side of the transaction where some earn an income when one spends a dollar. It is the payment for goods and services.
In theory, Gross Domestic Income should equal Gross Domestic Product. That is just common sense. If someone is spending a dollar, someone should be earning a dollar. However, in recent months there has been a wide divergence between Gross Domestic Product and Gross Domestic Income. During the first half of the year, GDP contracted at a 1.1% annual rate that was adjusted for inflation. At the same time, GDI, made up of a measure of corporate profits, wages and benefits, self-employment income, and interest in rent, expanded at a 1.6% annual rate. Maybe, as I have emphasized repeatedly, the economy may not be contracting as much as you are led to believe in the financial press. The traders and hedge funds want you to believe that everything is bad for their benefit.
This month we were advised that the GDP had been changed from the second quarter reporting at 0.9% negative to 0.6% negative. So, it could be said that the average in these two quarters was only marginally negative. As I reported in the previous posting, a large amount of this was due to the undercounting of inventory, which clearly had a major effect on GDP in the first quarter of 2022. Now we get the news that the Federal Reserve of Atlanta has posted its projection for the third quarter of GDP at 1.4% (September 7, 2022). If the Atlanta Federal Reserve is correct, they are expecting a major turnaround in GDP in the third quarter from basically a breakeven level in the second quarter to a hearty increase of 1.4% in the third quarter. If the Federal Reserve is forecasting such a large increase and their historic record for predicting these GDP levels has been excellent, why is the financial press so negative? You know for their benefit.
One of the major reasons why people misunderstand the Inflation Index is that they do not understand how it is calculated. Let us assume that on January 1st a product cost $2, but on January 1st of the following year, that product has gone up to $4. Easy arithmetic would allow you to calculate that the inflation rate is 100%. But let us just say for instance that on the following first day of the year that product continues to be priced at $4. In this case the inflation rate is zero given that year over year it has not increased. You as a consumer still feel this price is elevated, but from an economic standpoint it is the same.
That is the situation that we are now coming into as we roll into the Fall. Much of the increase in inflation was realized at the end of 2021 where the M2 money supply grew dramatically due to government handouts. As we get into the Fall in 2022, we will be comparing inflation reports against each other that do not reflect such a large increase. Therefore, my prediction is that at the beginning of 2023 you should see dramatic declines in inflation, but much of that is due to comparisons with a period of time where inflation was out of control.
We all realize that a large portion of inflation is due to the higher gas prices. But even that is starting to wane. In the West, gas prices remain elevated, but in the South, gas prices have started to decline. In fact, gas prices have declined over the last three months, although only marginally. However, as prices declined, it is noticed by all consumers using energy. All facets of the U.S. economy are driven by gasoline prices. You have farmers using gasoline, and trucks delivering products to the grocery stores and therefore this price is built into the cost of food. As prices of gasoline decline do not expect the price of food to decline, but rather stay constant. The one thing that affects consumers is when they buy an item one day and come back a month later and the price is higher. If we had stable food prices then you would not have the high volatility associated with going up on a monthly basis. We are getting closer to that day.
I promised I would make reference to the energy shortage going on in Europe. It is a very interesting time for them since the German economy decided that they would stop all forms of energy production in their country and rely solely on the environmentally friendly natural gas. They made a plan to shut down and close all of their coal-generated electric plants. In addition, they phased out all of their nuclear energy producing plants in the county. Their solution to this issue was very simple. They would buy virtually all of their energy needs from Russia.
They entered an agreement with Russia to build an extraordinarily expensive gas pipeline so natural gas could be easily transferred from Russia, where it is in oversupply to Germany which has no supply. It is now believed that at the first of this year, Germany was buying over 80% of their fuel needs directly from Russia. What is interesting is that other countries in the European Union went in the other direction. Virtually all the energy in France is powered by nuclear plants. It was somewhat confusing to investors to watch Germany deactivate all their nuclear plants while France continued to build theirs throughout the countryside. The European Union is not a very tight union.
Now we have come to a time where Russia is using the natural gas as a political weapon against Germany. As of Friday, they announced that the pipeline would be shut for an indefinite time for maintenance. Germany is facing a huge burden in order to provide energy for their upcoming winter. How will a country like Germany get enough natural gas and other forms of energy to keep the country warm during the winter? Most importantly, many industries in Germany use natural gas to provide for their manufacturing facilities. Obviously, these companies will be phased back or deprived of any natural gas, hurting the GDP of Germany.
I vividly remember when then President Donald Trump told Chancellor Angela Merkel that she was endangering their country for relying on Russia for her country’s natural gas, and it seems that prediction has clearly come true. While other countries are trying to fill this void, it would be virtually impossible to provide the amount of natural gas that was being purchased from Russia. In the United States, natural gas is about $7.8 per thousand cubic feet, while natural gas in Germany and Europe is roughly 10 times that amount. The U.S. cannot help this time.
The U.S. is quickly trying to increase its exportation of liquified natural gas. However, the U.S. just does not have enough facilities or capacity to export the amount needed in Germany. Almost assuredly the energy crisis in Europe will reduce the GDP of the countries involved and will almost assuredly create economic hardship for the people that live there.
China is undergoing some major changes that have certainly affected their economy. First, their shut down for COVID seems to be grossly overdone. It was recently announced that they would shut down a city in China with over 21 million residents. You would think based on the news release that this would constitute a severe outbreak of the Covid-19 virus. Come to find out that this shutdown was a result of only 700 known Covid-19 cases. What is interesting about China is that they never adopted the vaccines from the West and due to the massive shutdowns, there are not as many people in China, percentagewise, that have had Covid-19 as in the U.S. The odd thinking on this is that if you shut down a city of 21 million people, whatever virus is there is not likely to spread but the loss of productivity and GDP because of the shutdown would be economically devastating.
While the U.S. now continues to struggle through and put workers back to work due to the reduction in COVID cases, the Chinese have a zero COVID policy and are willing to shut down productivity and manufacturing in many of their cities. This leads to the conclusion that China is taking a step back from growth in its GDP. If they are willing to suffer a major shutdown in productivity due to such few cases, you must think that their GDP will be greatly reduced for several years to come.
Every day I am asked whether it is good time to invest. As a long-term investor, it really does not bother me what is happening on a day-to-day or week-to-week basis. The only reason I would be concerned is if the economy was falling off a cliff towards a major recession. The traders and hedge funds have a theory that the U.S. could not avoid recession at this point as the Federal Reserve increases interest rates. I think they might just be wrong. Take as an example, we have now more workers than ever in the U.S. earning salaries. Each of those salaries allows for them to go to the grocery store, buy a new car, pay a mortgage on a house, etc. But it is also true that we need to slow the economy.
During 2021, we allowed the economy to get out of hand and grow too fast without any direction. Now the economy has slowed in the first two quarters of 2022, but if the Atlanta Federal Reserve is right, it may begin to grow in the third quarter. Certainly, after reflecting on the corporate earnings for the second quarter, Corporate America is really doing very nicely. However, stocks have still been crushed. Right now, 20% of the companies within the S&P 500 have a P/E ratio of less than 10. Given that the historic percentage of price earnings is roughly 17, the fact that so many of them are selling for less than 10 reflects how cheap the market really is. What is even further interesting is that 5% of the S&P 500 have a price earnings ratio of less than 10 and a dividend rate in excess of treasuries. There are many stocks now that are selling at historic low levels without explanation.
For years we have talked about the shortage of computer chips to manufacture cars, computers, televisions, and everything else. Most chip manufacturers today have already sold out of next year’s supply of chips. In fact, I am reading that some major chip manufacturers are selling against 2024 inventories rather than even 2023 inventories. If that were the case, that a manufacturer can sell everything they can possibly make, why are chip stocks down 30%–40% so far in 2022?
People ask me all the time where I get my confidence that the market will come roaring back. First and most importantly, it has never not come back from a downturn. There is a 100% success rate in the market recovering all its losses.
What gives me the most confidence is that the best fund managers anywhere in the world are actually performing at a level below what the S&P 500 Index is performing. These are the very best stock pickers in the world and these guys make millions and millions of dollars a year managing stock funds. However, if you look at their portfolios, they are actually losing at a level greater than what the S&P 500 Index is losing. If you analyze their portfolios, you will notice that they are holding the same stocks that everyone on the financial news deems to be toxic. If we are aligned with the best stock pickers in the world, how could we not be in line with a rebound sooner rather than later?
Everywhere around you see economic prosperity. Just go to the airport and wait in line and see if you can get on a flight. I fly often and every seat in every airline is full. I even had to reflect on the future of U.S. citizens as I noted a line all the way down the terminal waiting to get into a Popeye’s Chicken. Americans have money and they want to spend it. With each new employment report, we put more people to work which will generate GDP for the economy. While it is true that higher interest rates will slow various segments of the economy, those segments needed to slow down anyway. Certainly, housing needs to slow down so that we can bring the supply chain back in line with the demand.
I am so amused when I talk to prospective homebuyers, and they quote a 5% rate for a current mortgage. A 5% rate when I was buying my first house would be considered a bargain. The 2% rate that we had for a while was unheard of ever in the history of American finance. What I predict will still happen is that people wanting homes will buy them anyway.
It is clear the economy has slowed down from 2021, but that is a good thing. It looks to me that the Federal Reserve is taking all the right actions. They are slowing the economy, but they are not dumping it into recession. The unfortunate part of killing inflation is that a large portion of inflation is wages. The only way to dramatically reduce wages is unemployment. I do not think that there is a chance in this world that this government or the Federal Reserve would enjoy seeing fewer people working just to reduce inflation. Therefore, it is my projection that we will see tamer inflation going forward and we will see higher interest rates by the Federal Reserve, but not raises so much as to damage employment. As I have said often in these postings, I still believe we will make money in 2022 and all the volatility and wild moves by the traders and hedge fund managers will be only a bad memory come early 2023.
Almost every day you hear on the financial news that the demand for goods and services is slowing down, but that is actually a good thing because it will slow down the economy. The economy needs to slow down before inflation can be under control. I think this may be one of those phrases that The President uses all the time that lack support. I believe in his mind that if he says it often enough and stern enough people will start to believe that it is the truth. We all know we cannot build enough cars quickly enough and we do not have the microchips to assemble the cars with chip manufacturing backed up for at least two years. The demand for employees creates the problem that the companies cannot produce enough since they do not have enough employees to deliver the services. The problem is not demand; the problem is supply. If we had the capacity to supply the economy with all of the goods and services that it wants, there would not be an excess demand issue. There, of course, would not have been an excess demand issue if consumers did not have excess money. If we were in recession the consumers would not have excess money.
If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into a slower period for our Firm and will have the time to sit down and review your portfolio, taxes or anything else you might be interested in.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
I know it is very frustrating for you as an investor to sit back and watch the market trend down week after week and get nothing but more bad news from the financial press. This is not my first “rodeo” as I have been through many of these downturns in the past. You really have to separate an investing period created by a bad economy from one created by overzealous traders and hedge funds. Today we have that exact situation where investors are losing money and oftentimes making bad investment decisions just because the market is acting in a manner that does not reflect its economic underpinnings. I will try to explain all of this throughout the post.
I also want to look into what is happening in the international markets with China taking a hard line on Covid-19 and the serious problems affecting Europe and their energy crisis. Finally, I want to express my opinion on the phrase you read everywhere in the financial press nowadays, which is “demand for goods and services is slowing throughout the economy.” Hopefully, I can explain that phrase better.
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| Long-time family client, Anand Nallathambi and his beautiful bride Sara Kate Somers – congratulations! |
For the month of August, the Standard and Poor’s 500 Index was down 4.1%. For the year, it is down 16.1%, but on a brighter note, over the ten years, this index has averaged a gain of 13.1% per year. During the month of August, the NASDAQ Composite Index was down 4.5% and continues to be down 24.1% for the year 2022. The 10-year average on this index is positive 15.7% per year. The Dow Jones Industrial Average was down 3.7% during the month of August and is down 12% for the year 2022. The 10-year average on this index is positive 11.8% annually.
If you thought you would be more conservative and invest in bonds, you certainly got hurt during August. For the month of August, the Bloomberg Aggregate Bond Index was down 2.8% and is now down 10.7% for the 2022 year. As a comparison to all the indexes above, which have had double-digit gains over the years, the bond index only has a positive return of 1.3% for the 10-year average.
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| Over 30-year client Jennie Woodlee with her adorable new housemate |
Clients really do not seem to understand why these types of trading events occur since they are not in tune with the day-to-day volatility that comes with trading. I wonder how many investors were actually sitting in front of their computers at 10:00 a.m. on Friday, August 26th, to punch the sell button on their securities. As this clearly demonstrates, this selloff occurred because the traders took a negative position due to Chairman Powell’s comments about more interest rate increases.
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| Size matters – Cici showing Josie how it’s done. 2 pounds vs 80 pounds |
Even though those stocks mentioned above have excellent records and continue to report record profits, they are trending down because they are also the largest component of each of the indexes. So, when you see an index selloff with such a sharp inter-day reversal, you can rest assured that it is not investors who are taking those losses, but traders and hedge funds.
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| Partner Eddie Wilcox enjoying time with wife Jennifer and daughters Harper + Lucy in Bellevue, Iowa |
Another reality that must be remembered during this time of year is that there are very few traders actually working during this vacation time of year. The volume on the markets have been low recently and it is much easier for a trader to manipulate the market when there is such low volume. Once again, the average investors look down at their portfolio that is losing percentages, meanwhile, this is all artificial trading to benefit traders and hedge funds to the detriment of the average investor.
All these swings in the market should not be construed to believe that the market is bad. The underlying strength of the market continues to be high employment and high corporate earnings. Neither of those appear to me to be winning over the hedge funds and traders. On Friday, September 2nd the Labor Department reported that 315,000 new employees were hired for the month of August. While certainly, this was an excellent number and a great many employees went back to work, it was less than the 526,000 jobs that were reported during the month of July. Maybe this is showing a sign of a decrease in employment, but I highly doubt it.
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| Aw, they grow up so fast… Ava Rollins at age 2 and age 11 |
People are also confused as to why the jobless rate rose to 3.7% in August from the 3.5% low in the previous month. These are statistical numbers that confuse people when they do not read all the details. Even though there was an increase in employment of 315,000, there was a marked increase in the number of people that are in the job market. Market participation is extraordinarily important. Since the pandemic, many people have elected not to work, and the participation rate has only been 60% of the workforce in a given month. This month we saw a rush of new employees back into the employment market, which is an extraordinarily good thing for future employers. With this increase in the number of people willing to work, the percentage of unemployment goes up since the number of people employed divided by the available number of employees creates this average. For all practical purposes, this employment report was a “goldilocks” report. It shows that the economy continues to expand with new employees, but not so hot that it needed immediate reaction by the Federal Reserve in the way of higher rates.
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| They sure do! Josh Rollins at age 3 (not “fore”) and age 27 |
What is interesting to me is that all of these so-called inflation indicators have not properly forecasted inflation. At one time we were led to believe that gold was the ultimate representation and protection against inflation. However, for the year 2022, gold is down roughly 6.8% – so no help there from gold.
During the peak of the selloffs in 2022, I received many calls from clients that wanted to buy inflation-protected bonds. At that time, the bonds were paying a rate equal to the inflation rate and many thought that this rate was only going to go up. However, if you look at the inflation-protected index represented by Fidelity Investments, you will note that it is down 7.6% for the year and is actually down 6.1% for the 12 months ending August 31, 2022. These very well-known indicators of inflation have not supported the case of higher costs into the future. All of this I believe to be very encouraging information for stock investors. If in fact we have a shift in inflation over the next two or three months, maybe this long grueling selloff will finally turn around.
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| CPA Erik Kramschuster with wife Carly – cheers! |
In theory, Gross Domestic Income should equal Gross Domestic Product. That is just common sense. If someone is spending a dollar, someone should be earning a dollar. However, in recent months there has been a wide divergence between Gross Domestic Product and Gross Domestic Income. During the first half of the year, GDP contracted at a 1.1% annual rate that was adjusted for inflation. At the same time, GDI, made up of a measure of corporate profits, wages and benefits, self-employment income, and interest in rent, expanded at a 1.6% annual rate. Maybe, as I have emphasized repeatedly, the economy may not be contracting as much as you are led to believe in the financial press. The traders and hedge funds want you to believe that everything is bad for their benefit.
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| Alexis Chambers with boyfriend Evan Bentley - Let’s go Braves! |
One of the major reasons why people misunderstand the Inflation Index is that they do not understand how it is calculated. Let us assume that on January 1st a product cost $2, but on January 1st of the following year, that product has gone up to $4. Easy arithmetic would allow you to calculate that the inflation rate is 100%. But let us just say for instance that on the following first day of the year that product continues to be priced at $4. In this case the inflation rate is zero given that year over year it has not increased. You as a consumer still feel this price is elevated, but from an economic standpoint it is the same.
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| DeNay Gonzales not only believes, she knows! |
We all realize that a large portion of inflation is due to the higher gas prices. But even that is starting to wane. In the West, gas prices remain elevated, but in the South, gas prices have started to decline. In fact, gas prices have declined over the last three months, although only marginally. However, as prices declined, it is noticed by all consumers using energy. All facets of the U.S. economy are driven by gasoline prices. You have farmers using gasoline, and trucks delivering products to the grocery stores and therefore this price is built into the cost of food. As prices of gasoline decline do not expect the price of food to decline, but rather stay constant. The one thing that affects consumers is when they buy an item one day and come back a month later and the price is higher. If we had stable food prices then you would not have the high volatility associated with going up on a monthly basis. We are getting closer to that day.
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| Big smiles from Dr. Willie Cochran and his lovely wife Rebecca Clients for over 15 years |
They entered an agreement with Russia to build an extraordinarily expensive gas pipeline so natural gas could be easily transferred from Russia, where it is in oversupply to Germany which has no supply. It is now believed that at the first of this year, Germany was buying over 80% of their fuel needs directly from Russia. What is interesting is that other countries in the European Union went in the other direction. Virtually all the energy in France is powered by nuclear plants. It was somewhat confusing to investors to watch Germany deactivate all their nuclear plants while France continued to build theirs throughout the countryside. The European Union is not a very tight union.
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| Power couple Dr. Seenu Gorjala and Dr. Pramoda Gorjala Clients for 25 years |
I vividly remember when then President Donald Trump told Chancellor Angela Merkel that she was endangering their country for relying on Russia for her country’s natural gas, and it seems that prediction has clearly come true. While other countries are trying to fill this void, it would be virtually impossible to provide the amount of natural gas that was being purchased from Russia. In the United States, natural gas is about $7.8 per thousand cubic feet, while natural gas in Germany and Europe is roughly 10 times that amount. The U.S. cannot help this time.
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| Partner Robby Schultz at Sea Island with a “baby shark doo doo doo doo doo doo…” |
China is undergoing some major changes that have certainly affected their economy. First, their shut down for COVID seems to be grossly overdone. It was recently announced that they would shut down a city in China with over 21 million residents. You would think based on the news release that this would constitute a severe outbreak of the Covid-19 virus. Come to find out that this shutdown was a result of only 700 known Covid-19 cases. What is interesting about China is that they never adopted the vaccines from the West and due to the massive shutdowns, there are not as many people in China, percentagewise, that have had Covid-19 as in the U.S. The odd thinking on this is that if you shut down a city of 21 million people, whatever virus is there is not likely to spread but the loss of productivity and GDP because of the shutdown would be economically devastating.
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| Glen and Anita Butler - Clients of 35 years – lookin’ good! |
Every day I am asked whether it is good time to invest. As a long-term investor, it really does not bother me what is happening on a day-to-day or week-to-week basis. The only reason I would be concerned is if the economy was falling off a cliff towards a major recession. The traders and hedge funds have a theory that the U.S. could not avoid recession at this point as the Federal Reserve increases interest rates. I think they might just be wrong. Take as an example, we have now more workers than ever in the U.S. earning salaries. Each of those salaries allows for them to go to the grocery store, buy a new car, pay a mortgage on a house, etc. But it is also true that we need to slow the economy.
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| Lauren Lukowicz, new to our Client Support Team, with Mac – say cheese! |
For years we have talked about the shortage of computer chips to manufacture cars, computers, televisions, and everything else. Most chip manufacturers today have already sold out of next year’s supply of chips. In fact, I am reading that some major chip manufacturers are selling against 2024 inventories rather than even 2023 inventories. If that were the case, that a manufacturer can sell everything they can possibly make, why are chip stocks down 30%–40% so far in 2022?
People ask me all the time where I get my confidence that the market will come roaring back. First and most importantly, it has never not come back from a downturn. There is a 100% success rate in the market recovering all its losses.
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| Client Sheryl Matton celebrating her birthday with daughter Caroline in Florida |
Everywhere around you see economic prosperity. Just go to the airport and wait in line and see if you can get on a flight. I fly often and every seat in every airline is full. I even had to reflect on the future of U.S. citizens as I noted a line all the way down the terminal waiting to get into a Popeye’s Chicken. Americans have money and they want to spend it. With each new employment report, we put more people to work which will generate GDP for the economy. While it is true that higher interest rates will slow various segments of the economy, those segments needed to slow down anyway. Certainly, housing needs to slow down so that we can bring the supply chain back in line with the demand.
I am so amused when I talk to prospective homebuyers, and they quote a 5% rate for a current mortgage. A 5% rate when I was buying my first house would be considered a bargain. The 2% rate that we had for a while was unheard of ever in the history of American finance. What I predict will still happen is that people wanting homes will buy them anyway.
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| Clients Patty & Jim Radney - A day without laughter is a day wasted! |
Almost every day you hear on the financial news that the demand for goods and services is slowing down, but that is actually a good thing because it will slow down the economy. The economy needs to slow down before inflation can be under control. I think this may be one of those phrases that The President uses all the time that lack support. I believe in his mind that if he says it often enough and stern enough people will start to believe that it is the truth. We all know we cannot build enough cars quickly enough and we do not have the microchips to assemble the cars with chip manufacturing backed up for at least two years. The demand for employees creates the problem that the companies cannot produce enough since they do not have enough employees to deliver the services. The problem is not demand; the problem is supply. If we had the capacity to supply the economy with all of the goods and services that it wants, there would not be an excess demand issue. There, of course, would not have been an excess demand issue if consumers did not have excess money. If we were in recession the consumers would not have excess money.
If you have an interest in coming down to visit with us, we look forward to seeing you. We are moving into a slower period for our Firm and will have the time to sit down and review your portfolio, taxes or anything else you might be interested in.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.
This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees, and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
