Inflation, Interest rates and “Trouble with the Curve”
by Bob Schneeweis
In a 2012 movie with Clint Eastwood (Trouble with the Curve), an aging baseball scout (Eastwood) with failing sight and years of experience and can hear how the bat sounds when a prospect hits the ball is in conflict with management that is more centered on data, what looks good and will sell with the public. We have a new “Trouble with the Curve” (the interest rate curve). So What? – Well, today there is an opinion that inflation is improving and the Fed should halt interest rate hikes now. This opinion feels good as it forwards the view that recovery will come sooner rather than later. Many economists (and the Federal Reserve) however know that low income and fixed income (retired) families suffer most from inflation and continue to support elevated interest rates that could result in unemployment and recession until we are more certain inflation is under control. Not being serious enough over inflation in the 1970s is an economic study on this issue and resulted in the Fed raising interest rates nearly 10% in just over 2 years.
The following graph from Gallup shows that public concern over inflation is the highest in 40 years.
Here’s what I think:
- Inflation and elevated interest rates are highly likely to remain the dominant considerations influencing the investment environment for the next several years and the Federal Reserve needs to be resolute in addressing them.
- What’s become clear is that superabundant government stimulus does in fact incur negative consequences, as the inflation of the past few years can attest. We saw an incredible rise in the stock price of companies that made no money. That available “free” money made it difficult, if not impossible, to distinguish investment skill from surfing the tide of superabundant liquidity.
- It appears what we have now has gone back to recognizing businesses that actually turn a profit rather than just a dream of one.
- Fixed Income and “modern alternatives” can support portfolios with reasonable returns and low risk.
What is different now from the last 40 years? Howard Marks, Co-Chairman of Oaktree Capital Management has remarked “It seems to me that a significant portion of all the money investors made over this period resulted from the tailwind generated by the massive drop in interest rates. I consider it nearly impossible to overstate the influence of declining rates over the last four decades.” – So we recognize that along with inflation and rising interest rates, new approaches to globalization and changes in our energy sources have impacts that require investments that not only look to the future, but also protect your money and give some certainty in an increasingly uncertain world. This has always been our focus and continues to protect the assets we manage.
While most of today’s news seems challenging, with the Russian invasion of Ukraine, Global Warming and a looming recession, we believe opportunities exist. We see new opportunities for fixed income returns, modern alternatives investments that we’ve championed for years and a return to more equally weighted stock selection. Yes, rising interest rates and a need to reduce Federal debt is a new government focus, but adjustments can be made in your investment approach to deal with it.
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