From the Desk of Joe Rollins
I am not sure I ever recall a time when there was so much confusion about the U.S. economy. I have clients call daily to express their concerns regarding the extraordinary events and request a different approach to their investment philosophy. The truth of the matter is that the economy is actually quite strong, and the recently announced unemployment rate of 3.4% is the best in the U.S. since 1969. Think about that for a second. We have the best unemployment rate in the last 54 years, and yet the financial media only discusses the upcoming recession, and the negative aspects of the Federal Reserve increasing interest rates.
There is not a lot of news so I thought I would discuss the issue regarding employment and the upcoming recession as predicted by the Federal Reserve. I also want to discuss the ongoing so-called banking crisis in the U.S. but as a change of pace I wanted to discuss the most recent points raised in The Economist that a client furnished me with titled “The Lessons of America’s Astonishing Economic Record.”
R E T U R N S
I have a great many things I want to discuss, but first I must report that the month of April was quite satisfactory in its performance and the year-to-date numbers on the S&P 500 were quite spectacular. For the month of April, the Standard and Poor’s Index of 500 Stocks was up 1.6% and year-to-date for 2023 that index is up 9.2% which is absolutely an excellent return.
I also want to point out that the 10-year average on this index, even including the terrible year we had in 2022, is still a double-digit return of 12.2%. The NASDAQ Composite for the month of April was barely up at 0.1% but has a year-to-date return of 17.2%. The 10-year average of the NASDAQ Composite is quite a satisfying 15.1% per year. The DOW Jones Industrial Average was nicely up in April at 2.6%. Unfortunately, the year-to-date numbers are less satisfactory, at 3.5%. Once again though, the 10-year average on this Index is double digits, up at 11.2%.
The Bond market had a good month during April due to interest rates on government securities falling. The Bloomberg Barclay’s Aggregate Bond Index was up in April by 0.6% and for the year it is up 3.7%. As with the others, the 10-year index return over a 10-year period is 1.3%. As you can see the return on bonds over the last decade has been minuscule compared to the returns on stocks.
E M P L O Y M E N T
The big news of the week is that the Labor Department announced on Friday that there had been 253,000 new jobs added to the U.S. economy for the month of April. This came as a stunning rebut to the government’s attempt to destroy jobs and lay people off. They indeed revised the previous two month’s labor numbers down so that the average is roughly 222,000 new jobs added per month. For example, last year, the economy was adding roughly 524,000 new jobs per month, but that was a reaction from the pandemic and employers were hiring back their employees. The evidence is still clear that the economy continues to be strong despite the efforts of the Federal Reserve to destroy the economy.
Employment numbers are actually quite good (a 54-year record). Once again, this month’s job openings were 9.59 million and the total unemployed is 5.6 million and once again, this month there are roughly two jobs for every unemployed person in America. One of the things that could be said is it is clear now that the demand for labor is easing as employers hire fewer people every month. But what is even more clear to me is that the supply of labor is getting increasingly scarce. When you have an unemployment rate of 3.4% virtually everyone that wants employment can be employed with ease. As an increasing number of people go to work, employers are having a challenging time finding qualified employees. Once again, the participation rate this month was 60.4% which means more and more U.S. citizens are actively looking for a job.
R E C E S S I O N
At the beginning of 2022, all the so-called experts pointed out that due to the interest rate increases by the Federal Reserve, we would suffer a severe recession in 2022. I countered that until you saw unemployment starting to soar you were unlikely to see a recession. Here we are, 15 months after those incorrect calls for a severe recession and we have yet to see any signs of one yet. There is no question that the economy is slowing down, but that is actually a good thing since it takes the pressure off the Federal Reserve to continue to increase interest rates. Unless we see unemployment start to move dramatically higher, I doubt that we will see a recession in 2023 either.
One of the sad attributes of the volatility of the last couple of years is that certain clients have pulled their money from investment accounts and put it into cash accounts. For the first time in an exceptionally long time, cash is now paying a decent rate of return where you can get money markets that pay 4.5% to 5% annual returns. However, if you compare that with the performance of the Standard and Poor’s Index of 500 Stocks, which is up 9.2% for the year through April, a 5% money market account hardly compares. Once again, when investors start to view their investments on a short-term basis, they lose the long-term performance that these indexes provide. As mentioned above, each of the major indexes over the last 10 years had double-digit returns even with the 18% that the S&P 500 Index lost in 2022. The value of long-term investing is that the short-term problems get wiped out by the long-term horizon. You should never focus on short-term volatility in a long-term investment philosophy.
B A N K I N G
There seems to be a great deal of negative reaction from investors regarding the volatility of what is going on in the Regional Bank selloffs. First, I should make it clear that there is no economic threat to the U.S. economy due to this volatility. A great deal of it is centered strictly on the traders on Wall Street attempting to sell off these stocks for their benefit. As you have noticed, some of the Regional Bank stocks were down 40% in a week, but last Friday, they jumped back up 10%. This has nothing to do with the economic effects of the bank, but more to do with the act of trading by the short-term traders attempting to bring the stocks down.
For those of you who have not kept up with the ongoing crisis, it started innocently enough when the Federal Reserve began increasing interest rates in March 2022. The Federal Reserve has now increased interest rates ten times over the last 14 months, which is an all-time unprecedentedly large increase in rates. The Federal Reserve intended to starve consumers of credit so they could not buy houses, cars, or other sizable items. The theory was that if the Federal Reserve could make interest rates high enough consumers could not afford large ticket items, therefore the economy would slow and correspondingly inflation would go down. However, the effect of the rate increases was surprising to most. A bank by charter is required to keep the bulk of its assets in Treasury Bonds or zero-risk interest rate certificates. Many banks invest in these on a long-term basis, so they keep all their customer deposits either loaned to other customers or invested in long-term government securities, never investing short and lending long.
As the Federal Reserve began increasing interest rates, the value of the bond portfolios owned by banks decreased. As we all know, bonds move inversely into interest rates. Due to the rapid and unprecedented increase in these rates, the bond portfolios of the banks were materially impacted. But the real news came when other financial institutions were able to offer interest rates to customers in the 5% range. Banks were unable to provide interest rates that high due to their long-term loan commitments to customers. Suddenly, cash became king in regional banks, as customers moved money out of these banks and into other financial institutions that paid higher rates of return.
There became a flood of money out of these banks because they could not compete with the higher rates of interest offered elsewhere. This, coupled with the serious deterioration of the bond portfolio created the issue of possible bank failures due to liquidity issues.
Three banks have failed, but in each of those cases, the Federal Reserve stepped in and made sure that no depositors’ money was lost. They also did something else that was even more important. In the period after the first two bank failures, the Federal Reserve pushed money into these banks with a $300 billion cushion.
The Federal Reserve wanted to make sure that these banks were well-funded and could manage withdrawals by customers. Essentially, at that point, the crisis was over. Banks had ample liquidity to meet the redemptions and the benefactor of all that cash was the Federal Reserve. While the short sellers on Wall Street continue to push this point for regional banks, there is really no crisis. These banks were stabilized by the government and even though they continue to have mass withdrawals in an effort by consumers to receive higher interest rates, it is unlikely that these banks will fail because of that action. Therefore, when you read every single day about the so-called bank crisis, just feel a bit of peace to know that truly it is not a crisis at all “If it bleeds, it leads” with the financial media.
D E B T
We have received many calls from clients concerned about the impasse regarding the Federal debt limit which comes due in July 2023. During my working career, I have witnessed many of these crises come and go. Back during the Clinton administration, the Republicans controlled both levels of the House and they pushed the government into default which created complete chaos in the economy. At the end of the day, what happened was that all the government employees were laid off, and the government shut down for some time. However, no employees lost any money since they were hired back and were paid their back wages from the time they spent laid off.
While it is true that it may be a situation where the government cannot pay its bills, do not think for a second it is going to impact their ability to pay their debts. First off, one of the largest holders of government debt in the U.S. is the U.S. Social Security system. In addition, the government can print money whenever it likes, and if there is any attempt to reduce their credit, they are likely to manufacture the money necessary to keep their debts under control.
There may be a brief time when the government cannot pay its bills for a couple of months, but once again no debts will be left unpaid. I believe that this particular Congress is so polarized by their political differences that there are going to be difficulties regarding the debt limit whenever it comes up. But I have high confidence that they will compromise before the debt limit expires in July. Even if they cannot agree, no substantial damage to the U.S. economy will be done.
E C O N O M Y
It seems now in 2023 that the number of U.S. citizens has become increasingly concerned about the economy. In a recent poll, 4/5 of those polled believe that their children will be worse off than they were when they grow up. That 80% rate of people that are gloomy about the economy, is substantially higher than 1990 when only 2/5 of the American citizens felt that way. Roughly double the number of U.S. citizens are now questioning whether their children will be better off in the future than they are today.
As mentioned above, a client sent me the article from The Economist titled “The Lessons of America’s Astonishing Economic Record.” This article basically points out that regardless of the pessimism from current U.S. citizens, the economic facts are clear that America remains the world’s richest, most productive, and most innovative economy. As the article points out, no one really comes close. The interesting facts in this article explain how strong the U.S. economy is compared to the rest of the world. As pointed out in the article from 1990, America accounted for one-quarter of the world's output of goods and services. Thirty years later, that share is almost unchanged even as China has gained economic clout.
With the huge run-up in China’s economic base, the percentage that the U.S. produces remains the same over the last 33 years. What is even more astounding is that the U.S. accounts for 58% of the G7’s GDP. If you think that the U.S. economy is deteriorating, that same percentage in 1990 was 40% of the level of the G7’s GDP. This fact alone indicates that the level of the U.S.’s GDP as compared to the richest countries in the world has grown substantially since 1990 and has not deteriorated as many would believe. Truly astonishing facts.
W O R K F O R C E
The article points out that one of the major reasons that the U.S. has held up its economic place in the world is that over the last 30 years, the number of workers in America has increased by 30%, while workers have only increased by 10% throughout the rest of the world. I also want to point out that due to the innovations of the American economy, if you would have invested $100 into the S&P 500 in 1990 that initial investment would be worth more than $2,000 today. They indicated in the article that the return would be four times higher than if you had invested in any other major country in the world.
One of the main reasons why the economy continues to be so strong compared to the rest of the world is the heavy influx of migrants into the United States. At the current time, immigrant workers make up 17% of the workforce, compared to only 3% of immigrants working in the Japanese workforce. Many countries are dealing with aging populations. Much has been written about the effects on the Japanese workforce and even the Chinese workforce which is getting older. It is astonishing to believe but even though the fertility rate in the U.S. has dropped, the average age in the U.S. is lower today than it was 10 years ago. This is due to the influx of migrants. While the rest of the world continues to age, the U.S. on average is getting younger. In China and Japan, an aging population is their biggest fear.
Everyone ignores the fact that the average income for Americans continues to be one of the highest in the world and it continues to grow. You see prosperity everywhere you look, and you just cannot ignore it. I drove from my office in Buckhead into Midtown to meet a client and I was astonished at the number of buildings under construction along Peachtree Road. The Midtown area in Atlanta exploded into high rises and large corporate tenants. Even though the construction of apartments continues to grow daily, it is still inadequate to keep up with the number of people that move into Atlanta.
If you want proof of this wealth being built in America, the Economist article points out that the income per person in America was 24% higher than in Western Europe in 1990. If you took that same measurement today, income per person in America is 30% higher than it is in Western Europe today. As pointed out in the Economist, the most important attribute of a country building wealth is the large workforce and productivity of that workforce. Basically, the larger the workforce and the more productive they are, the more the economy grows overall.
What is interesting in America is that the population of critical working-age 25 through 64 has risen from 128 million in 1990 to 175 million in 2022. That is an increase in the available workforce of 38%. However, compare that to Western Europe where the working age population rose 9% during the same period from 94 million to 102 million. As you can see the increase in the workforce population is dramatically higher in the U.S. than in the rest of the wealthy countries in the world.
From the analysis made by the Economist, the income median in the U.S. is increasing leading to salaries increasing. As more and more employees earn higher middle-class wages, they spend that money on consumer goods and services which increases our economy. As pointed out by the Economist, even though 80% of the population believes that their children will not be financially better than they are, the facts are quite different. If you read the analysis as pointed out in the Economist, the economy and its citizens are getting stronger, not weaker. With this ability to buy consumer goods and basically retire with adequate income, the outlook for the future of today’s children looks brighter than people expect.
O I L
One of the most astonishing facts is that the U.S. in the early 2000s imported roughly 10 million barrels of oil per day in net terms. As you know it became a matter of national security that we could not provide the amount of oil needed to run our country. In the case of war, if we were unable to provide adequate oil resources, this would result in a major detriment to the military front. However, due to learning about hydraulic fracturing and horizontal drilling, the U.S. oil industry turned around quickly to supply this need. The U.S. became a net exporter of oil in the year 2020. Even though we could completely fund our oil needs in 2020, the new administration decided to attack fossil fuels, and the U.S. has not been able to keep up with its energy needs since 2021.
C O N C L U S I O N
I must agree that the news on the U.S. economy has been unpleasant for the last 14 months. However, as I pointed out back in 2022, I did not think the recession was imminent and I still do not believe it will be. If we have a recession, it will be short and relatively modest. The Federal Reserve announced that the GDP was up 1.1% in the first quarter of 2023. You must understand that the first quarter when reading GDP is historically the weaker of the quarters. GDP is held up by severe weather in the U.S., particularly in the northern states, and GDP tends to increase substantially as you get into the more productive summer months.
I am not sure that the Federal Reserve will allow the economy to continue to grow. It seems to be their motto now that to make our economy better, they must destroy it. Hopefully, they will stop long enough to allow the economy to realign itself with the higher interest rates and begin to grow again.
This year has seen extraordinary gains through only four months of the year so far. If the economy continues to accelerate as we go through the summer, then these numbers will be even higher at the end of the year. I projected a gain of 20% this year based on my read of the economy and so far, the indexes have kept up with the prediction. Now is a suitable time to come in and visit us and discuss your goals as well as your retirement plan. I just feel sorry for those investors that left the market and have missed this large run-up that has occurred so far this year. Remember, I warned you here first (numerous times).
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
I am not sure I ever recall a time when there was so much confusion about the U.S. economy. I have clients call daily to express their concerns regarding the extraordinary events and request a different approach to their investment philosophy. The truth of the matter is that the economy is actually quite strong, and the recently announced unemployment rate of 3.4% is the best in the U.S. since 1969. Think about that for a second. We have the best unemployment rate in the last 54 years, and yet the financial media only discusses the upcoming recession, and the negative aspects of the Federal Reserve increasing interest rates.
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| Keep looking up, Cameron… That’s the secret of life! |
I have a great many things I want to discuss, but first I must report that the month of April was quite satisfactory in its performance and the year-to-date numbers on the S&P 500 were quite spectacular. For the month of April, the Standard and Poor’s Index of 500 Stocks was up 1.6% and year-to-date for 2023 that index is up 9.2% which is absolutely an excellent return.
 |
| Joe, Dakota, and Ava helping Josh celebrate his 28th birthday!! Hope it was a good one, Josh! |
The Bond market had a good month during April due to interest rates on government securities falling. The Bloomberg Barclay’s Aggregate Bond Index was up in April by 0.6% and for the year it is up 3.7%. As with the others, the 10-year index return over a 10-year period is 1.3%. As you can see the return on bonds over the last decade has been minuscule compared to the returns on stocks.
The big news of the week is that the Labor Department announced on Friday that there had been 253,000 new jobs added to the U.S. economy for the month of April. This came as a stunning rebut to the government’s attempt to destroy jobs and lay people off. They indeed revised the previous two month’s labor numbers down so that the average is roughly 222,000 new jobs added per month. For example, last year, the economy was adding roughly 524,000 new jobs per month, but that was a reaction from the pandemic and employers were hiring back their employees. The evidence is still clear that the economy continues to be strong despite the efforts of the Federal Reserve to destroy the economy.
 |
| Caroline trying to convince Reid that this is in fact their new home! |
At the beginning of 2022, all the so-called experts pointed out that due to the interest rate increases by the Federal Reserve, we would suffer a severe recession in 2022. I countered that until you saw unemployment starting to soar you were unlikely to see a recession. Here we are, 15 months after those incorrect calls for a severe recession and we have yet to see any signs of one yet. There is no question that the economy is slowing down, but that is actually a good thing since it takes the pressure off the Federal Reserve to continue to increase interest rates. Unless we see unemployment start to move dramatically higher, I doubt that we will see a recession in 2023 either.
 |
| Proud mom, Ramani Damera, with her lovely children Sohan and Sonali. Sohan will be graduating from UC Davis next month! Congratulations! |
There seems to be a great deal of negative reaction from investors regarding the volatility of what is going on in the Regional Bank selloffs. First, I should make it clear that there is no economic threat to the U.S. economy due to this volatility. A great deal of it is centered strictly on the traders on Wall Street attempting to sell off these stocks for their benefit. As you have noticed, some of the Regional Bank stocks were down 40% in a week, but last Friday, they jumped back up 10%. This has nothing to do with the economic effects of the bank, but more to do with the act of trading by the short-term traders attempting to bring the stocks down.
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| Ava not letting the fear of striking out keep her from playing the game! Go Ava! |
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| Client Lloyd King enjoying a night out with his son, Michael, as he cheers on the Sixers! |
There became a flood of money out of these banks because they could not compete with the higher rates of interest offered elsewhere. This, coupled with the serious deterioration of the bond portfolio created the issue of possible bank failures due to liquidity issues.
Three banks have failed, but in each of those cases, the Federal Reserve stepped in and made sure that no depositors’ money was lost. They also did something else that was even more important. In the period after the first two bank failures, the Federal Reserve pushed money into these banks with a $300 billion cushion.
 |
| All smiles from the Musciano-Howard clan – Mia, Barb, Marti, Ally, Brittany and Mitch |
We have received many calls from clients concerned about the impasse regarding the Federal debt limit which comes due in July 2023. During my working career, I have witnessed many of these crises come and go. Back during the Clinton administration, the Republicans controlled both levels of the House and they pushed the government into default which created complete chaos in the economy. At the end of the day, what happened was that all the government employees were laid off, and the government shut down for some time. However, no employees lost any money since they were hired back and were paid their back wages from the time they spent laid off.
 |
| DeNay on her way to help celebrate a friend's marriage in style |
There may be a brief time when the government cannot pay its bills for a couple of months, but once again no debts will be left unpaid. I believe that this particular Congress is so polarized by their political differences that there are going to be difficulties regarding the debt limit whenever it comes up. But I have high confidence that they will compromise before the debt limit expires in July. Even if they cannot agree, no substantial damage to the U.S. economy will be done.
It seems now in 2023 that the number of U.S. citizens has become increasingly concerned about the economy. In a recent poll, 4/5 of those polled believe that their children will be worse off than they were when they grow up. That 80% rate of people that are gloomy about the economy, is substantially higher than 1990 when only 2/5 of the American citizens felt that way. Roughly double the number of U.S. citizens are now questioning whether their children will be better off in the future than they are today.
 |
| Alexis shaking off tax season at Taylor Swift's Eras Tour in Atlanta |
With the huge run-up in China’s economic base, the percentage that the U.S. produces remains the same over the last 33 years. What is even more astounding is that the U.S. accounts for 58% of the G7’s GDP. If you think that the U.S. economy is deteriorating, that same percentage in 1990 was 40% of the level of the G7’s GDP. This fact alone indicates that the level of the U.S.’s GDP as compared to the richest countries in the world has grown substantially since 1990 and has not deteriorated as many would believe. Truly astonishing facts.
The article points out that one of the major reasons that the U.S. has held up its economic place in the world is that over the last 30 years, the number of workers in America has increased by 30%, while workers have only increased by 10% throughout the rest of the world. I also want to point out that due to the innovations of the American economy, if you would have invested $100 into the S&P 500 in 1990 that initial investment would be worth more than $2,000 today. They indicated in the article that the return would be four times higher than if you had invested in any other major country in the world.
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| Cecilia and Nathan smiling a-roar-ably while at the Fernbank Museum of Natural History |
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| Caroline ready for the D2 Summit Finals in Orlando - the D must stand for darling! |
If you want proof of this wealth being built in America, the Economist article points out that the income per person in America was 24% higher than in Western Europe in 1990. If you took that same measurement today, income per person in America is 30% higher than it is in Western Europe today. As pointed out in the Economist, the most important attribute of a country building wealth is the large workforce and productivity of that workforce. Basically, the larger the workforce and the more productive they are, the more the economy grows overall.
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| Mia with Josh- he still looks to her for advice after all these years (but he now has to look down when doing so) |
From the analysis made by the Economist, the income median in the U.S. is increasing leading to salaries increasing. As more and more employees earn higher middle-class wages, they spend that money on consumer goods and services which increases our economy. As pointed out by the Economist, even though 80% of the population believes that their children will not be financially better than they are, the facts are quite different. If you read the analysis as pointed out in the Economist, the economy and its citizens are getting stronger, not weaker. With this ability to buy consumer goods and basically retire with adequate income, the outlook for the future of today’s children looks brighter than people expect.
One of the most astonishing facts is that the U.S. in the early 2000s imported roughly 10 million barrels of oil per day in net terms. As you know it became a matter of national security that we could not provide the amount of oil needed to run our country. In the case of war, if we were unable to provide adequate oil resources, this would result in a major detriment to the military front. However, due to learning about hydraulic fracturing and horizontal drilling, the U.S. oil industry turned around quickly to supply this need. The U.S. became a net exporter of oil in the year 2020. Even though we could completely fund our oil needs in 2020, the new administration decided to attack fossil fuels, and the U.S. has not been able to keep up with its energy needs since 2021.
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| The Florida sun proving every day can end beautifully! |
I must agree that the news on the U.S. economy has been unpleasant for the last 14 months. However, as I pointed out back in 2022, I did not think the recession was imminent and I still do not believe it will be. If we have a recession, it will be short and relatively modest. The Federal Reserve announced that the GDP was up 1.1% in the first quarter of 2023. You must understand that the first quarter when reading GDP is historically the weaker of the quarters. GDP is held up by severe weather in the U.S., particularly in the northern states, and GDP tends to increase substantially as you get into the more productive summer months.
I am not sure that the Federal Reserve will allow the economy to continue to grow. It seems to be their motto now that to make our economy better, they must destroy it. Hopefully, they will stop long enough to allow the economy to realign itself with the higher interest rates and begin to grow again.
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| Joe looking forward to discussing how we can help you reach your goals and needs. |
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.
