Quote of the Week
“Life is a moving, breathing thing. We have to be willing to constantly evolve. Perfection is constant transformation.” – Nia Peeples
Not a lot to report on this week. The equity markets are flat for the week as of the close on Tuesday. Last week the equity markets were down right around -1%.
The only news of last week was the new jobs report showing 390,000 jobs added in May. The report is good for those who were hired but the report was a little “too good” and raised concerns of more short term interest rate hikes by the Fed in the future. Remember back to the fourth quarter of 2018, the Fed started raising interest rates into a declining economy and the equity markets sold off -33%.
We are definitely seeing signs of a slowing economy by multiple data trends.
I think that the Fed raising interest rates is a mistake. We have energy prices high and going higher. We have food prices high and going higher. And we have shelter costs high but starting to level off. The thought process by the Fed is if they raise short term interest rates it will bring inflation down. The problem is that raising interest rates should not have an effect on the components of the Consumer Price Index that are causing the the inflation.
Raising rates won’t effect the price of energy. That is determined on a world market price. With the estimate that the energy embargo on Russian oil will probably take four million barrels out of the supply in the next six months, prices will probably go up rather than down. The OPEC nations are certainly not going to come to our rescue by pumping more oil. They like high oil prices.
As far as food prices, the war in Ukraine is causing major shortages in wheat and corn, not mention the fertilizer which has gone up in price five fold.
The Fed is under tremendous pressure by the White House and consumers in general to do something to slow inflation. However the primary causes for rising inflation are outside forces that the Fed has no control over. I think the end result is a coming recession.
In our letter of May 9, 2022 we showed the characteristics of the four investment quadrants. We are repeating that information below for your review.
In general, you can expect the different asset classes as follows to perform in each of the respective quadrants.
Quadrant I is good for equities and for some bond positions.
Quadrant II is the best quadrant for equitites and commodities, but bad for most bond positions
Quadrant III is what we call stagflation. Some equity sectors can perfom but generally we are underweight equities. Quality bonds will work.
Quadrant IV is the death knell for equities. Cash and bonds are the best.
This week we are showing the “general” allocations for each quadrant. I want to point out that the “general” allocations are usually pretty accurate. However, due to economic and mathematical considrations our allocations of your assets maybe somewhat different than the chart below, This is to give you a good idea of where we should be in each Quadrant.
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