Almost done
It has been a bizarre year for
earnings. Despite higher prices and blockages in the global delivery chain, a
massive infusion of retail spending (mostly caused by two years of frustration
with and pent up demand in the economy) has caused profits to expand beyond
analyst’s expectations. Although the
aggregate demand curve is sloping upwards driven by the holiday gift-giving
season, we believe that earnings acceleration will run out of momentum in the
next year, limiting the percentage gain probabilities for equities.
Historically, the most potent bull
markets in stocks are underpinned by significant consumer confidence. And while the spending component is certainly
there, as noted above, confidence levels are mostly negative. The pandemic’s effects are being felt not
just in our healthcare and lifestyle patterns but also in our attitudes about how
things are being perceived.
Behaviors are changing and the fragility of “comfort” is being
reevaluated household to household.
When the pandemic arrived everything
shut down, affecting the demand curve as well as the supply chain. Everything we “knew” to be true was tossed
aside in favor of survival mode. Distribution
and acquisition of goods and services was a function of inventiveness and
creativity, good fortune, and preparedness.
We rediscovered the value of family and good health. Business’ warehousing and inventories
evaporated.
Today, supply issues are evolving, as
they always do. Some trends, such as
communication and medicine, were accelerated by the crisis. Our society’s obsession with instant
gratification comes at a cost…adaptability.
One’s expectations defines the limits of tolerance for any new paradigm:
investing, lifestyle, or otherwise. Some
adapt more easily than others.
Consumption habits are evolving to the supply chain issues. Not surprisingly, those with financial means
have adapted more easily and gained superior access to the necessities of
life…food, healthcare, housing…. thereby widening the wealth and culture gaps
that existed before the health crisis.
So, who is to blame? That, unfortunately is the subject of a tome
at another time and place, although we see no value at present for
recriminations about “what if?”
Wealth versus net worth
The dramatic rise in net worth during
this post-pandemic market surge is being fueled by rampant speculation in
financial assets, bloated expectations, and historically low interest
rates. While balance sheets are
expanding one must ask whether a double digit rise in the stock market is, at
its core, the same thing as building wealth?
It is worth noting that the percentage of the populace benefitting from
the market’s largesse is extremely small (as a percentage of the overall
population) because much of that growth has occurred in real estate, machinery,
and intangibles like patents and intellectual property.
Expansion in valuations can make
certain investments unattainable for many, while also increasing the likelihood
of an asset bubble like the kind which decimated the markets in 2008. Low interest rates might make the cost of
money inexpensive but the increase in debt worldwide means a large bill is yet
to be paid…and by whom?
Our thesis is that productive
wealth-building is the best way to
solve the planet’s needs with investments in infrastructure, health, climate,
energy, environment, and agriculture leading both our fiscal and moral compass
towards capital gains and emotional well-being.
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