ECONOMIC IMPACT. Broadly speaking our thesis on the longer term reversion to the mean in interest rates and growth is predicated on a few beliefs. One over riding is the belief, like EU, which have similar policies, growth going forward will be very low. To review, the primary drivers of growth over the last decade may have been tied to the sugar rush of mad fiscal spending and monetary money printing. That era maybe gone as inflation has been unleashed and although may fall in 2023 & beyond may remain elevated for some time unless the war resolves (if anything its escalating on top of Taiwan brewing). Fiscal spending is likely to be constrained tied to much higher interest rates which will cause a ballooning of interest payments in the govt deficit on top of prospects of Dems losing control of Congress. Simply put the US can't spend more or risk a dollar devaluation which UK just experienced. Thus, it is likely if this comes to pass, growth will revert to EU like rates well under 2% for a sustained period of time.
Regarding near-term rate hikes the bond market may have already factored in 150 more basis points (1.5%) more Fed hikes which if comes to pass may add more fuel to the fire for even slower growth. Thus, currently the high fear of recession which (already occurred in 1H22 and may again occur in next few quarters). We should note in 2014 the CRB commodity index was at similar levels tied to an oil spike and 10 year treasury rates were under 3% just to provide context. We would argue growth prospects were much better then vs now though inflation surely wasn't. To be clear ex food which FED has ZERO control over (WAR driven) commodities here in US have collapsed (to 2014 levels) and the FED we think knows this (unless they are ignorant). Thus why we say the Fed is pushing on a string inflation wise hiking rates. By raising rates further they are only destroying demand in other areas where demand and commodities have already fallen and continue to fall while not effecting the root inflation case which is FOOD. In end we think the Fed will temper or signal a pause in hikes soon enough.
INVESTMENT IMPACT. Given, the above with very slow growth, interest rates & inflation falling but not back to levels seen in in recent years and lack of growth stimulus from either money printing or fiscal means, growth may under perform for a sustain period of time. Thus, why with recession fears mounting we are opting to change the composition of models to more yield oriented stocks with growth names relegated to healthcare with the exception of one high end specialty clothing retailer. Consumer spending maybe the driver of low growth for a sustain period of time. In the end the components of total return for clients may come predominantly from dividends vs capital appreciation in the coming years.
We remind investors that going forward expectations for returns for the overall market over the next decade remain low as we expect well below returns vs history. Be that it may we are hopeful our models can improve on that going forward.
Our model portfolio performance has been updated as of the date of this newsletter.
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