If there was a September song for financial markets in 2021 it may be titled Fakey Breaky My Heart. And, just like a good country song, if you were to play it backward you would get your partner, your dog, and your truck back along with a 6-pack of Pabst Blue Ribbon as an extra bonus track. (Country Music - YEAH!)
Readers of last month's “Minutes” may recall that we penned lyrics that described the market's chorus as ranging within an inflection zone. We also shared in our bonus video, reviewing the lines in the sand we have been watching in equity markets that are helping us define whether this apparent inflection zone will result in a break-out higher to new all-time highs and a potential parabolic blow off crescendo style top or a more subdued break down of support, opening a window for equity markets to go through an overdue correction that may help tone down some of the current frothy pitch in markets.
By mid-September, equity markets seemed to be singing the song of a breakout to higher levels when suddenly someone changed the record on the jukebox, and markets shifted to playing their best rendition of Fakey Breaky My Heart. Sadly, rather than breaking out higher through resistance, markets broke hearts instead and performed a mid-month reversal to the downside, ending the month in a precarious position.
What happened to cause such a change in tune?
As my Grandfather would say, “Son, da shitz has gotten a little veird since we spoke last”. How weird?
Below is a brief run down, and at the end, there is something you are going to want to know!
(Hint: We drill down on how investments perform during times of stagflation and you’ll want to know what we have discovered in our research.)
What may be next?
Equity Market Volatility increased significantly,the VIX, which is a benchmark used as a measure of short term volatility and fear in equity markets, increased from Bar Mitzvah age (read 13) to well over the age of being able to rent a car (VIX peaked near 28) and as of this writing is resting around voting age (18). Quite a ride in a couple of weeks?
Fears of a financial crisis in China - Could China be sending us an economic COVID?China's overheated real estate bubble is starting to pop and Evergrande, a giant Chinese property developer, is heading toward defaulting on more than $300 billion in debt. Its failure could trigger a cascade of defaults among banks, materials suppliers, and investors, potentially leading to broader financial issues in China and abroad.
Remember Lehman Brothers in ‘07?
Well, basically a similar event is happening in China. This has increased concerns that certain outcomes could lead to a breakdown of confidence and an increase in counterparty risk within the Chinese economy and potentially sparking risk of a larger global contagion.
Anyone that was around financial markets in ‘07 will recall how we learned that financial markets are dependent on high levels of confidence partnered with the perception of low counterparty risk. Back then, we experienced how that partnership was a key component to keeping liquidity flowing in global markets, so there could be some PTSD from those times causing some market participants to adjust risk.
In other words, the developments in China threaten an important balance and have increased the concerns that a period of market volatility may be evolving.
Concerns about COVID-19 case numbers. Variants continue to pop up and the delta variant continues to keep cases and hospitalizations high. Investors are concerned that another winter resurgence (like we saw last year) could slow down business and economic activity.
Fears of another debt ceiling showdown.
Once an ordinary part of federal accounting, adjusting the debt ceiling is now a political negotiation, threatening the Treasury Department’s ability to pay its bills next month.
Though it’s unlikely either party will allow the U.S. to default on its obligations, this political brinkmanship adds anxiety each time it comes up. Another government shutdown could exacerbate political risks to markets.
Worries the Federal Reserve will start tapering soon. Investors and traders are uneasy about the idea that the central bank could start pulling back the support now that inflation is higher and the jobs market has improved. Businesses that depend on low interest rates and easy credit could be hurt.
The global supply chain is stressed at multiple points causing a rapid increase in prices and stoking additional inflation fears.
There has been no shortage of articles covering the supply chain issues.
According to various news articles we have seen, there are over 250 container ships sitting off the shores of the world's ports. This equates to a significant percentage of the global shipping capacity and many of these ships are supposedly only 70% full.
We have heard that the price for certain containers can be $15-$20K, a steep increase from their past average of $2-$3K. This is causing nervousness for investors about increasing costs as companies like FedEx recently missed earnings for the first time in years during a period of online shipping growth.
The Bottom Line…… Alright, enough with repeating what I imagine every newsletter out there is saying or what you may have heard on the 5 o’clock news, let’s get to the bottom line - what does all this mean for you as an investor looking for growth and income for your retirement accounts and 401(k)?
Something smells like stagflation. Do you know what to do? All these “veird things” happening smell a lot like the early stages of stagflation. While recently the financial media has been singing the song of inflation, we as proactive investors may want to start making a playlist of investments that do best during times of stagflation. It never hurts to be prepared.
Get a new Dog, a new Truck, and get your Partner back!
After studying times of stagflation, it’s become apparent to these data observers that investors and advisors with a skill set in reverse engineering and the ability to play a song backwards will have an advantage during times of stagflation.
Being proactive and thinking aheadare helpful skills when times require your portfolio to shift from depending on what used to work to what will work in the future as fundamentals change. Investors and advisors with these skills may have an advantage during times of stagflation and be able to use those skills as a way to earn a new truck, a new dog, and humorously a new younger partner during a time that many reactive investors will be wondering where their dog, truck and partner went.
Chart of the Month - Breadth vs. SP500 Price Source: mcm-ct.com August 2021
Knowing your options is key if you are going to have a chance of making a period of stagflation an opportunity for your retirement account as opposed to a threat. Here’s the thing to understand....
It’s been decades since anyone has had to invest around the obstacles that stagflation creates and that also creates an interesting dilemma. There hasn't been a lot of demand for stagflation investing knowledge over the past few decades so the resources are severely lacking and it’s not all that easy to find out which assets perform best or worst during times of stagflation.
Unfortunately, for those in the Red Zone, stagflation and inflation can cause a lot of chaos and confusion in investment decisions. Especially for those that are needing their investments to produce growth, income, and conservation during times of increased volatility.
For those that find themselves in the Red Zone, an important item to remember about stagflation (and inflation) is how few investments can produce growth, income, and conservation during extended periods of stagflation.
This leads to the importance of two types of knowledge. One, knowing which assets do well and not so well during times of stagflation and inflation. Two, knowing you have access to and the ability to easily invest into those asset class options within your retirement or 401(k) accounts.
In regards to point one - In times of Stagflation Focus on Forward Returns vs. Past Performance. It’s a good thing for Red Zone Retirees to remember that most wealth over the past 30 years has been created by Equities, Real Estate, and Bonds. All assets that benefit from the lower trajectory in interest rates and inflation rates we have experienced in that time frame. This has also allowed these assets to trade at lofty valuations relative to their historic norms as you can see by the chart below courtesy of Steve Blumenthal at CMG Wealth.
If the future has the potential for a different trajectory or even a change in the rate of that trajectory, markets will have a tendency to adjust valuations in order to align with new expectations. Those adjustments could lead to a period of time when making investment decisions based on how something has performed over the past year becomes a detriment to the wealth-building process. With that in mind, It may be worth considering the value that may come from focusing on the potential of forward returns instead of past performance.
Consider the following chart from www.cmgwealth.com that projects the potential future returns of various asset classes from where we sit currently out for the next 7 years. Fairly sobering and should encourage us to know our investment options or at least have a “guy” that does know about those options.
An interesting item to keep in mind about stagflation is that in the right environment it can create a period of time when asset classes that once lead the wealth-building process either turn and work against the wealth building process or become less effective. Investors that are armed with knowledge and have a broad optionality in the assets their retirement accounts can hold, will be better equipped to protect their net worth while also finding opportunities to grow their net worth during times of stagflation.
The good and bad news is, during times of stagflation and inflation very few investment options do well.
The bad part of that statement is fairly obvious. The good part is, if you know which investment options those are and have a plan of how to incorporate them into your portfolio, you may be able to turn a timeframe that is usually chaotic to most investors' net worth into a time of opportunity.
Here is the thing….Knowing which investments and alternatives to use is one thing, actually having access to those investment options via your retirement account or 401(k) is another.
In the event there is a time of stagflation in front of us, the challenge for many of us will become the ability for us to invest into these investment options via our retirement account provider as many of these options reside in the realm of Currencies, Commodities, Private Securities and Alternatives asset classes.
Which brings us to the second type of knowledge we mentioned above…..Knowing you have access to these investments in your retirement account or 401(k).
Many traditional IRA and 401k accounts do not offer the ability to hold or custodian these important stagflation-fighting assets inside a retirement account. Even though large endowments like Yale and Harvard have been adding more of these types of investments to their portfolios over the past decade, many of the traditional retirement providers are still living in old paradigms with technologies that are behind the curve in being able to offer some of these valuable portfolio diversifiers to individual investors like us.
Invest like the Yale and Harvard endowments -However, that doesn't mean you can't invest like the brains at Yale and Harvard. There are a couple of ways you can gain access to assets that may perform better than others during times of stagflation for your retirement account.
Options like Self Directed IRA’s and Brokerage Window optionswithin some 401(k)’s may give you the opportunity to invest in vehicles that can supplement your retirement investment diversification and hedge or profit from times of stagflation.
We can help….Knowing your options and setting those options up takes time, let us save you time and energy, contact us and we will help you find the right Retirement Account Custodian for you.
As much as we appreciate your attention, in order to keep things brief and to make sure that the trends we are seeing as future opportunities that we want to bring to your attention don't get overlooked, we will be publishing The Next Investment Wave next week.
In last month's Next Investment Wavewe discussed the apparent secular bull market developing in the Agricultural Technology sector, make sure to check it out here.
In the upcoming issue of Next Investment Wave we will be drilling down on the Healthcare Technology sector and how it may benefit from a time of stagflation or inflation, keep your eyes peeled, it’s a must-read if you are looking for opportunities to create growth in a portfolio.
Random Thoughts to Leave You With….
This is how the brains at Yale and Harvard have been allocating:
Keep this on your radar….The chart on the U.S. Dollar is looking more bullish and if that is the case, holders of Gold, Silver, Crypto, and other risk assets may want to pay attention to their risk and cash levels. Stay tuned as we update you on this in the future.
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